Succession planning often gets confused with Estate Planning. While similar, they are also different. Estate Planning is the process of the transfer of wealth and assets, which a business may be a part. Succession Planning on the other hand is the process of transferring both ownership and control of a business, with the goal of keeping the business open and operating in one way or another.
The Small Business Succession Planning Program at Kent State University can assist you in a a couple of ways. The first step is to contact us to have discussion around your broader succession planning goals and objectives (personal, financial, and for the business); we will then help you review your broader options undefined and then discuss whether a sale to the employees is worth further exploration. We also have including webinars on various topics and publications that you can review on your own time. The initial consultation, either by phone or in person, is usually at no charge. Depending on choices made, further work may be on a fee for service basis.
Selling to your employees via an Employee Stock Ownership Plan (ESOP) or Employee-Owned Cooperative can satisfy a number of needs for a seller. For many business owners, leaving a legacy to the employees and the community is an important factor. A sale to employees can create a buyer for a profitable company that may find the "open" market less viable or even personally appealing. And in certain cases, a sale to the employees may allow the owner who is not ready to retire the chance to transition out over time, or to gain some liquidity in their assets.
An ESOP is a qualified employee retirement plan. It differs from other qualified retirement plans in two ways: (1) It invests primarily in the stock of the employing company, and (2) it can borrow money. Since it is a qualified plan, company contributions to the ESOP are tax deductible, even when they go to repay the principal borrowed to buy stock in the company. Because the ESOP can borrow money, it can be a ready market for closely held stock, including minority interests. A controlling owner can sell a minority portion of his or her holdings now, obtaining liquidity but retaining control until selling the controlling interest at some point in the future. As with other forms of leveraged buyouts, it will probably be necessary to provide collateral on the ESOP loan in the form of company assets.
The ESOP is a flexible way to hold company stock. An ESOP can own as little as a fraction of 1 percent of the company stock, or as much as 100 percent of the company stock. The ESOP is one form of corporate ownership which can be combined with other forms of stock ownership among employees and outside shareholders. ESOPs can help to improve company performance. Studies have shown that companies that combine employee ownership and employee involvement are likely to outperform comparable conventional companies in productivity, job creation and overall corporate performance.
On top of improving their performance, ESOP companies enjoy significant tax advantages. The tax incentives make ESOPs an excellent mechanism for low cost financing, as well as another form of tax deferred income for employees.
An employee cooperative is a corporation owned and controlled by its employees that jointly markets the products or services produced by its member-employees in the same way as a farmers’ cooperative markets its members’ production of grain or milk. In most employee cooperatives, each member-employee has one vote in the affairs of the cooperative. Its profits are allocated among the members on the basis of the value of the labor (“patronage”) each contributes to the co-op. In co-ops, financial ownership is generally separated from voting control and distribution of profits. In some ways they resemble the operations of a Partnership or LLP, but in others they are different.
Employee-Owned Cooperatives have fewer moving parts, and a lower regulatory burden (and a lower corresponding cost to set up and maintain) than ESOPs. They are usually cheaper to set up than an ESOP and can therefore be a viable option for smaller companies. This lower regulatory burden also allows for more flexibility.