When you’ve built a successful business you’re proud of, the decision to sell it can be one of the hardest you ever make. However, all business owners need to have an exit strategy in place.
You’re likely aware of the traditional exit options: an equity sale, finding a strategic buyer, or for larger small businesses, even going public. Some owners may simply decide to wind their business down and shut their doors completely.
But you do have another option – it’s called an Employee Share Ownership Plan (ESOP) and it may provide just the exit strategy you need to keep your business locally rooted and your staff members meaningfully employed.
Simply put, ESOPs are a tool retiring business owners can use to sell the company to their employees. ESOPs are gaining popularity around the world, and while Canada does not yet have any specific tax incentives for business owners to adopt this model, there may be other good reasons for you to explore this option.
Flexible Exit Timeline
We already know that many members of the Baby Boomer generation aren’t retiring at age 65. Many enjoy their work and wish to continue contributing so long as they’re healthy and able to do so. This trend is likely to continue in future generations as more people see work as an extension of their personal lives.
An ESOP allows an owner to continue to have a significant role in the business, but with the flexibility to start reducing their value in the business by transferring that value to their employees. The longer transition period also ensures the owner is able to mentor and educate key people in their new roles.
In addition to a flexible departure, an ESOP also allows owners to begin accessing retirement capital through the liquidity of transferring shares to their employees.
Getting Your Money Out
All exit plans hinge on turning an illiquid asset (the business) into cash. In order for employees to buy shares in your company, the business must be professionally valued at fair market value (FMV).
FMV simply means "the highest price expressed in terms of money, or money's worth available in an open and unrestricted market between informed, prudent parties who are under no compulsion to transact and who are dealing at arm’s length."
So long as your company is profitable and likely to continue to grow, your employees won’t mind paying a fair price for the shares. While some owners think their employees can’t afford to buy their company, there are a number of financing tools to facilitate the process.
Leaving a Lasting Legacy
Research shows that many small business owners regret selling their businesses shortly after closing the deal. In many cases, they regret their decision even when they obtained the selling price they wanted.
One primary reason for this regret is that many exit plans fail to address the issues of succession or legacy. For many owners, it’s equally important to know that the culture and values they instilled in their company will continue after they leave.
An ESOP can help ensure the company will carry forward with people who share the previous owner’s vision and values.
What’s more, research also shows that employee ownership results in increased business outcomes including improved productivity, retention and engagement.
Is an ESOP Right for You?
Employee share ownership isn’t suitable for every small business, as it requires a shift to more participative management and a willingness to share financial information. However, for small business owners who want a more flexible exit timeline, a fair selling price and to leave their legacy intact, ESOPs are worth further exploration.