When you’ve built a business you’re proud of, deciding to sell it can be complicated. Still, having an exit strategy in place is essential for all business owners. While there are traditional options, like equity sales, finding a strategic buyer, and going public, there is another option. Employee Share Ownership Plans (ESOPs) are a great tool for retiring business owners to sell their company to their employees. In this article, discover three benefits of ESOPs and if it’s the right exit strategy for your business.
1. Enjoy a Flexible Exit Timeline
According to Statistics Canada, the average retirement age in Canada is 65. However, many people continue to work even after this, so long as they’re healthy and capable. For many, work is seen as an extension of their personal lives, so this trend is likely to continue in future generations.
An ESOP allows you to retain a significant, active role in your business while providing the flexibility to transfer ownership to your employees. This extended transition period also allows you to mentor and prepare key staff for their new roles.
In addition to a flexible departure, an ESOP also allows you to begin accessing retirement capital through the liquidity provided by selling shares to your employees.
2. Convert Your Business to Cash
Every exit plan hinges on converting an illiquid asset – your business – into cash. In order for employees to buy shares, your business must be professionally valued at fair market value (FMV).
FMV refers to “the highest price, in terms of money or its equivalent, that could be obtained in an open and unrestricted market between informed, prudent parties who are acting independently and under no pressure to transact.”
As long as your company is profitable and likely to continue growing, your employees should generally be willing to pay a fair price for shares. While some owners think that their employees can’t afford to buy their business, there are various financing tools available to facilitate the process.
3. Leave a Lasting Legacy
It’s not uncommon for small business owners to regret selling their business soon after finalizing the deal – even when they received the selling price they wanted. A primary cause of this regret is that many exit plans fail to address the critical issues of succession and legacy. For many business owners, it’s important to know that the culture and values they instilled in their company will endure after they leave.
An ESOP can help preserve these values by transferring ownership to employees who share the owner’s vision. Plus, research shows that employee ownership results in improved business outcomes, including higher productivity, retention, and engagement.
Is an ESOP Right for You?
Employee Share Ownership Plans aren’t suitable for every small business, since they require a shift to more participative management and a willingness to share financial information. But, for small business owners who want a more flexible exit timeline, a fair selling price, and to keep their legacy intact, ESOPs are worth exploring.
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