Recently, Travis Conway, Managing Director of SDR Ventures explained in CEOWORLD Magazine how new financing options are making employee stock ownership a potentially attractive alternative for those looking to sell their business. In the article, Travis discusses the benefits to the owners and employees who choose to pursue an Employee Stock Ownership Plan (ESOP) instead of selling by means of a more traditional transaction.

Travis explains that creating an ESOP can be a viable option for owners who are reluctant to sell their business outright on the open market. Owners often worry what will happen to their companies and employees upon their departure; after all, they have put in the blood, sweat and tears to build the company.

ESOP TransactionA properly structured ESOP can offer a “win-win” scenario for both owners and employees, Travis states. If executed properly, an ESOP can provide the business owner with the financial liquidity they are seeking while also directly incentivizing employees by giving them a stake in the ownership of the company.

While in the past business owners have relied on banks and other traditional sources to provide financing for their ESOPs, new financing options from non-bank lenders, such as private equity firms, have begun to financially assist companies in executing ESOP transactions.

Before determining whether or not an ESOP is a viable option for a particular company, it is important to understand how they work. By its structure, an ESOP is a tax-advantaged management buyout vehicle that serves as an employee benefit retirement plan.

The process begins with owners electing to legally convert their C or S Corporation into an ESOP Trust. This is followed with the appointment of an independent third-party trustee. Next, the company contributes its own stock to the plan for the benefit of the company’s eligible employees, which includes the CEO and other executive officers. The trustee is tasked with presiding over the ESOP’s trust and carrying out the allocation and flow of ownership shares. Shares are allocated and distributed over a vesting period, typically based upon an employee’s total compensation, tenure at the company or a combination.

An example of one such ESOP regarding which SDR was able to assist, was for a family-owned produce company based in California whose CEO was nearing retirement. The CEO was hesitant to sell his multi-generational business to a strategic buyer, in fear of what could happen to the company’s loyal customers and employee base, as well as the company’s longtime trade secrets. In addition to protecting the company he had built, the CEO also wanted to reward the dedication of his employees, not just the current shareholders. With private equity financing, SDR was able to help the owner structure and close an ESOP transaction that met the owner’s objectives. This successful transaction provided the CEO with an immediate payout and an additional stream of income after retirement, while also rewarding his long-time and trusted employees with ownership shares in the business.

ESOPs can provide many benefits, and with non-traditional financing now available, ESOPs are becoming more feasible for business owners who otherwise wouldn’t have considered employee ownership. However, Travis explains there are negatives to consider as well, including potential ongoing advisory, legal and administrative costs, and legal risks if the ESOP is not structured properly. Top-grade advisory from experienced ESOP experts is therefore a must.

In short, for those owners who feel concerned about transferring of ownership to third parties, we encourage them to learn and gather as much information as they can to see if an ESOP is right for them, their business and their employees.

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