Looking to Sell Your Company? Here’s a Winning Formula!

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Most successful businesses are worth considerably more than the value of their assets alone. Since banks generally will not loan money on “good will,” it’s difficult for an owner to get the value they seek in exchange for a lifetime of work because a third party purchaser is often interested only in the value of a company’s hard assets.  The result: most businesses are sold at a reduced price, with better than 9 out of 10 owners financing at least some of the transaction, frequently as low as 50% of the selling price.

What are your options?

Your most favorable buyer may be an Employee Stock Ownership Plan (or ESOP). The ESOP will pay fair-market for your shares and can close in as little as 120 days.  You’ll also enjoy powerful tax advantages, allowing you to defer or even avoid taxation on the sale.

The Employee Stock Ownership Plan concept was developed in the 1950s by lawyer and investment banker Louis Kelso, who argued that the capitalist system would be stronger if all workers, not just a few stockholders, could share in owning capital-producing assets.

Echoing Kelso, the ESOP Association, founded in 1978 believes that employee ownership increases productivity as it enables employees to share in the wealth they create.  Their belief was substantiated in a major Rutgers University study (yr. 2000) of closely held ESOP companies, where it was found that ESOP companies perform better than their pre-ESOP performance would have predicted and are also more likely to remain in business. Moreover, ESOP companies have other retirement-oriented benefit plans more often than comparable non-ESOP companies.

Cranston Print Works Company, Webster, Mass, is one of the oldest ESOP companies in the U.S.  In business since 1824, they became an ESOP in the 1970’s.  On its website are quotes from employee-owners: “… this is my company and by working my hardest and demanding my co-workers work to their potential, … I can directly impact our success and prosperity.”

“I own a piece of this company — that allows me to make it a better place to work.”  

“We share in overcoming our challenges, and if we do, we will share in the rewards.” 

“I have to work harder because it is my responsibility as an owner.”

You might be wondering how your employees could afford to own your company.  “Employees are not required to contribute personal funds, acquire loans, or provide personal guarantees,”says Dynasty Capital Advisors’ Vice President, Myron Goodrum. “Instead, the purchase is conducted in the form of a contribution, similar to other tax-qualified plans.”  In the end, the owner receives a check for fair market value and the employees become owners of the stock through a solid retirement plan invested in the company’s shares. An ESOP is unique among qualified employee benefit plans in its ability to borrow money. As a result, “leveraged ESOPs” may be used as a technique of corporate finance.

Some merger and acquisition companies, such as Atlantic Management Co, Inc., Portsmouth, N.H., includes ESOP transactions among its services, along with business valuation, and ownership transition.  Other companies such as Dynasty Capital Advisors, a Hammond, Louisiana based company, focus solely on ESOP transactions and operate nationally.

Richard Duffy, Chapter Development Officer for the ESOP Association and President of Ownership Vision, Inc., a Salem, N.H. consulting firm providing communications and ownership culture services to ESOP companies, explains that, “An ESOP gives a company the opportunity to create a competitive advantage that can increase profitability from 3 to 13%.”  Duffy further states, “ESOPs are a vehicle for broadening the distribution of wealth. We have a very small percentage of people who control the wealth and capital in this country.  I believe strongly in spreading employee ownership so the people who helped create the wealth and capital share in the benefits of it.”

There are over 11,000 ESOPs in place today, covering 10 million employees, including the widely publicized deal recently executed by Sam Zell with the Chicago Tribune. A few other familiar ESOP companies are: Anderson Windows, Publix Supermarkets, and W.L. Gore Associates (makers of Gore-Tex).

The Tribune deal is largest ESOP buyout ever – over $13 billion!  “This deal painted a new path for acquiring companies using an ESOP,” says President of Dynasty Capital Advisors, G. Rogers Smith.  “Using an ESOP allows someone like Zell to take control of a company and share the ownership with the employees.  It’s a textbook case of what is possible, untried ever before.”  Given the performance record of ESOPs, it was a good move for both Zell and the Tribune.

Dynasty Capital (www.dynastycapital.com) is one of the nation’s most active ESOP providers. Myron Goodrum is responsible for business development and new client selection.  “In ESOP circles we are known as the firm that can ‘get the transaction closed.’ In fact, we close more than 96% of the transactions we accept,” he says. (Myron Goodrum can be reached at [email protected]).

(First version printed in NewHampshire Business Review. 9/07)

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