Employee ownership succession plans
What is an employee ownership succession plan?
An employee ownership succession plan is when you sell your business and your company transitions to one that is owned by the broad base of employees who help make it successful every day. There are several forms of employee ownership, and it is important to select the one that is the right fit for your business and your goals.
How does this benefit me?
Broad-based employee ownership keeps your business rooted in the community and the local economy, sustains quality jobs, creates stronger businesses, and preserves your company’s legacy. In some cases, there can be significant tax benefits. In all cases, transitioning to employee ownership enables the business that you worked so hard to build to continue to deepen its legacy. It also enables you to move into your next chapter, whether retirement or another new adventure.
How does this benefit my employees?
Employee ownership sustains quality jobs in the community. It allows for the workers who made your business successful to be rewarded while continuing your legacy. Employee-owners enjoy some of the benefits of ownership and are incentivized to “think like an owner” in their day-to-day roles.
Will my employees know how to run my company?
This question uncovers one of the top myths about employee ownership. The employee-owners would not be running your company day-to-day as you do as the owner. Management would stay in place, and the transition process ensures time to mentor and/or hire leadership replacement. Employee-owners have a strategic voice in business decisions, and most often, a role on the board of directors. Employee ownership will most likely entail some cultural shifts to deepen or develop an ownership culture, investment in participatory management and training and support for employees, managers and directors.
Are my employees taking on enough risk to work as hard as an owner?
Yes. If the business fails, they may lose their investment, their livelihood, or both.
Will my employees have enough money to buy my company?
Depending on the form of employee ownership, employees may not be required to put up any money to become owners. In an ESOP (Employee Stock Ownership Plan), ownership is a retirement benefit. In an Employee Ownership Trust, shares are held on behalf of the employees. In a worker-owned cooperative, employee-owners each purchase a single voting share whose price is set relative to their wages, rather than to the value of the business, so that becoming an owner is a financial stretch, but not out of reach. As a result, employee ownership transitions are primarily financed by debt.
Will I get market rate if I sell to my employees?
Yes. Sellers who transition their companies to employee ownership will receive fair market value plus potentially significant tax advantages. We would expect the sale price for transitioning to employee ownership to be on par with what the business would be valued by other buyers, based on a third-party valuation. A sale to employees would be unlikely to match an offer from a “strategic buyer” that is willing to pay a premium due to synergies the acquisition would bring to its company.
What are the tax benefits?
Employee Stock Ownership Plans (ESOPs) have potentially significant federal tax benefits to the seller (at >30% of stock held by the ESOP), to the business and to the employees. With worker-owned cooperatives, the seller can potentially receive lifetime deferral of capital gains tax, and profits shared with employee-owners as patronage are tax deductible to the business. Employee Ownership Trusts (EOTs), however, do not have specific tax benefits.
Is it complicated?
Any business succession plan takes effort. Project Equity helps with every step of the process, first by making sure you are a good fit, through performing a feasibility analysis. If we find that an employee ownership transition can meet your goals, we help you map out an action plan on a timeline that is comfortable for you.
How long will it take to transition my company to employee ownership?
The amount of time it takes to transition a company depends on many factors. Including a thoughtful up-front feasibility assessment, the timeline could be 9-18 months, on the shorter end if all parties are on the same page about major questions. We recommend investment in training for the new employee-owners and managers throughout the process, and also after the sale to help ensure the development, or deepening of, an ownership culture.
What are the different types of employee ownership and how do I choose?
The three main employee ownership models: ESOPs (Employee Stock Ownership Plans), worker cooperatives and Employee Ownership Trusts. Each model has some key characteristics that can help you decide what will work best for your company.
How do we know if our business is a good fit for employee ownership?
There are many factors to consider when assessing fit, including company size, years in business, profitability, and ultimately your personal and business goals. If you want to explore employee ownership, but you aren’t sure your business is a fit, we can help you. We offer free consultations for business owners.