This article is part of a series. For Part 1: Employee Incentive ESOPs, click here
The COVID-19 pandemic has forced many owners to start thinking seriously about what their business would look like without them around to run it. Would it keep going? Would it be ready for another shutdown?
The pandemic has presented the greatest economic challenge in the past decade. It would be a terrible shame to have worked so hard to keep your business intact through this tumultuous time and fought your way into a recovery, only for your business to shutter when you retire. Your employees deserve better, your customers deserve better, and so do you.
A Menke Employee Stock Ownership Plan (ESOP) can give your company the competitive edge it needs to boost your recovery and protect against further disruptions, including another shutdown. Protect your legacy and get the peace of mind that comes from knowing that when you decide to step down—whether that’s next year or next decade—you will have put your business in a better position to survive and thrive.
The Right ESOP for You
Every Menke ESOP is custom-tailored to fit our clients’ unique needs. Broadly speaking, ESOPs fall into two categories: Employee Incentive ESOPs and Succession ESOPs. Both forms of ESOP bring with them significant benefits that can give your business a distinct edge over your competition during this recovery period and beyond.
In this post, we will be looking at some of recovery-powering benefits of Succession ESOPs.
What is a Succession ESOP?
Succession ESOPs are for founders and shareholders who are ready to pass 100% ownership of their business to their employees. Selling full control to an ESOP maximizes the tax advantages for both the seller and the company, putting the business in as strong of a financial position as possible to face any challenges ahead.
A Succession ESOP also sends a powerful, motivational of trust and faith to your workers. Your employees showed extraordinary commitment to over the last few months; this is the perfect way to demonstrate your commitment to them.
To see what a Succession ESOP can mean to a business, read our client case studies on Basden Steel or landscape architecture firm MKSK.
Make Your Own Market
Many business owners think they don’t need a succession plan because, when the time comes, they will be able to simply find a strong, qualified buyer who will recognize the time and love they have put into growing their business and be ready to pay well and keep the business intact. The fact is, only around 20% of small businesses successfully sell—and that was before the pandemic.
Finding a buyer is even harder now, particularly one willing to pay full fair market value, let alone one who will keep your company intact. Selling to an ESOP enables you to create your own market, one with a buyer that is obligated to pay fair market value and has a vested interest in protecting your company and your employees’ jobs. You will never find a buyer more enthusiastic about your business, more knowledgeable about your services and client base, or more determined to protect the jobs you’ve created than your own employees.
A Smooth Sale
Selling a business can be a tricky process. It can seem like a transaction is going to close, only for the buyer to pull out at the last moment. With the ways in which the pandemic has reshaped the economy, that story is all the more commonplace. Not only is an ESOP obligated to pay fair market value for the business, they also offer much greater certainty of close.
You can defer the capital gains from the sale—indefinitely in some cases—and diversify your holdings to grow your family’s wealth. And unlike selling 100% to an outside buyer, you can sell full control to an ESOP and continue to hold a prominent leadership role in your business until you are truly ready to step back and enjoy your retirement on your terms.
A Lasting Legacy
We covered some of the productivity-boosting, morale-raising, longevity-increasing benefits of selling to an ESOP in Part 1 of this series (How an ESOP Can Power Your Company’s Post-Shutdown Recovery, Part 1: Employee Incentive ESOPs), and they all hold true for Succession ESOPs. In fact, because a Succession ESOP means the ESOP will own 100% of the company stock, the company will be able to fully maximize its tax benefits.
When you create a Succession ESOP, you ensure that your business will be able to continue creating jobs, serving your clients, and improving your community for years to come. At a time of incredible uncertainty, there may be no greater gift to give the employees who helped your business make it this far than the knowledge that you are putting them in the best competitive position you can.
Secure Your Future—Today
At Menke, we have been advising businesses in all 50 states for more than 45 years. We’ve helped thousands of clients through good times and bad, strong economies and recessions. Here’s the honest truth: right now, no one knows exactly what’s coming next. In light of everything that’s happening on the local, national, and global level, no one can say with certainty where the economy will go, or whether there will be another crash, or what bills might be passed or what regulations might be changed to deal with the fallout.
Here’s what we do know: right now, at this moment, the advantages to selling to an ESOP are considerable. You can sell as much or as little as you want—make it an Employee Incentive ESOP or a Succession ESOP—you can retain as much control as you want for as long as you want, you can protect your legacy by keeping the business you built intact, and you can defer the capital gains, diversify your investments, and protect your family’s future at a time of unprecedented uncertainty.
It is possible that, in order to promote employee ownership, lawmakers could further increase the tax benefits of selling to an ESOP. It is also possible that lawmakers might reduce the tax benefits of ESOPs, or make it harder to install an ESOP, in order to fund other efforts that arise from the economic impact of the pandemic. The Menke Group will monitor any developments on this front and advise all of our clients accordingly. But if you want to have the certainty of locking in all the benefits that selling to an ESOP offers, now is the time to do it.
Make Your Recovery Count
Far too many businesses did not survive the shutdown. Many more won’t survive the next one, should it come. The businesses that are recovering today didn’t get to this point by accident. You got here because you made the right choices for yourself, your family, your employees, and your clients. Now is the time to make sure those choices last.
Succession planning is about the future, and making that future as bright as possible for all the people who count on you. A Succession ESOP has the power to turn your recovery into the start of your business’s greatest chapter yet.
Menke is your one-stop shop for Succession ESOPs. From drawing up the plan document to structuring the deal to securing financing, we provide the full range of sell-side services you need to implement your ESOP, saving you time and money and making it easier than ever to give your employees the industry-leading benefits they deserve.
Contact us today to get started.
Menke & Associates, Inc. has helped over 3,500 companies successfully transition to employee ownership. Our holistic ESOP approach enables a positive outcome for the company, its employees and its shareholders. We believe ownership is powerful.
Phil DeDominicis is an ESOP strategist and M&A advisor who has guided 300+ companies through ESOP formations, financing, and transactions over 20+ years at Menke & Associates. He specializes in selling ESOP‑owned businesses to financial or strategic buyers and in helping ESOP companies acquire other businesses.
