What is Employee Ownership as an Exit Option for Business Owners?

For some business owners, exiting their company is about more than achieving the highest possible sale price. They may also want to protect the company they’ve spent years building and the people who helped them build it, while preserving its place in the community.

Employee ownership (EO) can help owners pursue those goals while providing a viable exit strategy that creates value for the seller, the business, and its employees. Advisors with knowledge of EO transitions can help their clients understand all of their options early in the planning process. In this blog, Zarin Kresge, Associate Director of Learning Programs at Project Equity, shares what Certified Exit Planning Advisors (CEPA^®) should know about employee ownership as an exit option.

The Types of Employee Ownership

There are three primary types of broad-based employee ownership options in the U.S.: Employee Stock Ownership Plans (ESOPs), Employee Ownership Trusts (EOTs), and worker cooperatives.

The most common form is an Employee Stock Ownership Plan (ESOP), a qualified retirement plan that holds company stock on behalf of participating employees. There are roughly 6,500 ESOPs in the U.S. They operate across industries and geographies and scale well. The largest ESOP in the country is Publix Supermarkets, with roughly 260,000 employees.

ESOPs can be a good fit for companies with sufficient size and cash flow to support the set up and ongoing costs associated with the structure. As a general rule, Project Equity often recommends a company with at least 30-40 employees and $1M Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) as a potential ESOP candidate, although it can vary based on each individual business.

Employee Ownership Trusts (EOTs) and worker cooperatives are other employee-ownership options for advisors whose clients might be too small to consider an ESOP. Both are generally less expensive to establish and maintain than an ESOP, and are profit-sharing plans, unlike an ESOP, which is a qualified retirement plan.

Why is Employee Ownership an Attractive Exit Option?

From a business owner’s perspective, employee ownership can be an attractive option for several reasons, including preserving legacy, enhancing company performance, improving employee retention, and offering potential tax advantages.

Just as important, selling to employees also provides an additional buyer option, increasing the odds of a successful transaction. This is especially important because selling a business can be difficult; as Exit Planning Institute^® Chairman Christopher Snider notes in Walking to Destiny, “70% to 80% of businesses put on the market don’t sell.”

“There are millions of business owners over the age of 55, and we are in the middle of a massive wealth transfer,” Zarin says. “At the same time, selling a business is not always easy. Employee ownership creates another viable path for owners looking for a buyer.”

For some owners, preserving their legacy after selling the business might be as important a factor in their exit plan as the financial outcomes.

“Something that comes up repeatedly is that the business owner could have sold to private equity or a competitor, but they were concerned about what would happen to the company they had spent years building and to the people who helped them build it,” Zarin adds.

For advisors, employee ownership can not only help their clients exit in a way that preserves their legacy but also create an opportunity for a new relationship with the employee owners.

“Employee ownership is a powerful succession strategy and has many other benefits, but it can also build employee wealth. Those employee-owners may need an ecosystem of advisors around them, including financial guidance, insurance products, and 401(k) support. That creates opportunities for longer-term relationships,” Zarin says.

Starting Employee Ownership Conversations with Business Owners

Discovering whether a business owner client might be a good fit for an employee ownership transition begins with the Value Acceleration Methodology™ and working with the business owner to understand their exit objectives.

Is the owner’s priority maximizing the sale price? Do they want to preserve the company’s independence? Do they want the company to stay in the community? Are they concerned about what might happen to their employees and customers after they leave? Those questions can help determine whether employee ownership belongs among the options the owner should explore.

“Great advisors help clients evaluate all available options. For that reason, employee ownership needs to be on the table. Advisors do not need to become experts in every aspect of employee ownership, but they should be confident enough to explain it at a high level,” Zarin adds.

Project Equity offers online learning courses through its EO Advantage platform to help advisors better understand employee ownership options. Some of these courses also offer continuing education (CE) credits for CEPAs looking to meet their CE requirements for keeping their credential current. 

Keeping Employee Ownership on the Table

Employee ownership might not be the right exit option for every business owner. Still, for owners who place significant value on the future of their company, employees, or community, it can be a compelling option.

By keeping employee ownership on the table, advisors can help business owners evaluate a broader range of transition options and identify the path that best aligns with their financial and personal goals - potentially creating lasting value for the owner, employees, and the business.

“While not every business should become employee-owned. It’s important for advisors to recognize when it could be a really good option for their client.” Zarin adds.

Related Resources

• • What is an Employee Ownership Trust?
  • Learn more about ESOPs with EPI Academy
  • Why Employee Engagement is a Key Value Driver