Goering Center news: Optimize your business succession plan

How an ESOP can help you transition your business

By Julie Williams

Business succession planning is a dynamic process that can address a full spectrum of issues, from your personal financial needs to your company’s long-term viability. It is about discovery, analysis and revealing the best strategy for you to achieve your unique financial and personal objectives. The process is likely to be far more wide-ranging and rigorous than you might think. As a business owner, you have a variety of options to achieve your liquidity and exit objectives, including an IPO, a sale to a third party or a sale to a related party such as a family member or management. Alternatively, selling your business to an employee stock ownership plan (ESOP) is a transition option that can provide you with the ability to attain liquidity and address ownership transition objectives in a tax advantaged manner. ESOP strategies can also bring several advantages that are not available with other transition strategies.

Most business owners contemplating selling or transferring their businesses have two goals in mind:

  1. Obtaining full value to fund their retirement; and
  2. Transferring that value to family or other beneficiaries in the most tax efficient manner.

A strong planning framework will assess the health of your business, provide adequate planning time and equip you with the right information to develop a favorable transition or exit plan. All options should be considered in concert with your identified priorities. A weak process could yield less than desirable results. The following three drivers are critical components of any business succession evaluation.

Competitive positioning

As a business owner, you likely recognize that shareholder value is a function of the company’s ability to successfully compete in the marketplace; companies with a competitive and sustainable advantage will realize shareholder value that reflects their superior position in the industry. There are many metrics to assess your overall business health, including but not limited to:

  • Sales patterns
  • Growth opportunities
  • Management and leadership
  • Profitability trends

Ultimately, your ability to achieve the best valuation for your business will rest on your ability to clearly illustrate the value proposition.

Perhaps the most important measure of value is the quality of your management and staff. In fact, all buyers, including ESOPs, will consider the strength of management in their assessment of value. A weak management team or lack of succession plan could lead to lower valuations (or limit the universe of potential buyers).

Capital market conditions

Value is a top consideration for most business owners when they transition their business. Owners must consider the value that can be achieved from a sale to an ESOP relative to financial and strategic buyer value (all on an after-tax basis), as well as differences in deal terms for each buyer type.

While price may be a top consideration, equally important factors may include the timing of receipt of cash proceeds, tax implications from the sale, and what your ongoing cash flows will look like after the sale compared to before the sale. Consideration should also be given to your full financial profile post sale, including:

  • Your personal financial statement
  • Liquidity and cash-flow needs
  • Risk tolerance
  • Asset protection for you and your family

Understanding your goals for current and future liquidity and whether or not each exit alternative accomplishes them will be critical to identifying the right solution.

Shareholder dynamics and objectives

After financial peace of mind, value-based goals can be key objectives of many business owners. Integration of financial goals with values-based goals can develop into a succession plan that considers the impact on all key stakeholders, including employees, family and community. Developing a strong succession plan and communication strategy enhances both the owner’s likelihood of successfully achieving his/her objectives and the company’s ongoing success post transition.

Values-based objectives and shareholder dynamics — when combined with competitive position and capital markets condition — often shape the ultimate transition strategy. For example, an ESOP may be the most employee-friendly alternative, but may not be a viable option based on the company’s financial profile.

A comprehensive planning process will include deep discovery of all stakeholders’ goals and objectives, analysis of all alternatives for transitioning your business, and measurement of each alternative with respect to your goals. It should demystify the impact of each exit strategy on your financial profile over the near and long term, and it should reveal opportunities to improve your long term financial security irrespective of which alternative you pursue.

Julie Williams is Managing Director, National Lead of ESOP Solutions at PNC Bank, a Goering Center member organization. Reach Julie at julie.williams@pnc.com or 616-771-8864.

About the Goering Center for Family & Private Business
Established in 1989, the Goering Center serves more than 400 member companies, making it North America’s largest university based educational non-profit center for family and private businesses. The Center’s mission is to nurture and educate family and private businesses to drive a vibrant economy. Affiliation with the Carl H. Lindner College of Business at the University of Cincinnati provides access to a vast resource of business programing and expertise. Goering Center members receive real-world insights that enlighten, strengthen and prolong family and private business success. For more information on the Center, participation and membership visit goering.uc.edu.

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