If there is one lesson to be learned from the upheaval of the past year, it is the importance of having a succession plan in place. No one can anticipate all the challenges that could accompany a global pandemic or a sudden massive economic crash, but having a roadmap for keeping your business intact in the event of a sudden crisis can be the difference between the business surviving the challenge or falling apart.
A recent New York Times article spotlighted the importance of having a succession plan, even if you don’t feel ready to retire. They shared the story of specialty food business Galena Canning Company, whose founder, Ivo Puidak, never created a succession plan, even after learning he had terminal cancer in 2017. His wife and son had no interest in taking over the business, so he decided to sell to an outside buyer.
Succession planning tends to feel like something that can always be put off until tomorrow—until it can’t.
Sadly, in March 2020, just two weeks before the sale was supposed to be completed, Mr. Puidak passed away. Simultaneously, the COVID-19 pandemic shut down the economy, Galena’s sales dropped dramatically, and the buyer’s financing disappeared. The deal fell apart.
Mr. Pudiak’s wife Shelly was ready to simply liquidate the business. The company her husband had created would be gone, every job he had created would be gone, but under that confluence of horrible circumstances who could possibly blame her?
Luckily, the Puidaks’ son, Max, who had worked in the company when he was in college, decided to set his own career path aside and take on the challenge of keeping Galena Canning running. He quickly discovered that his father’s gift for making delicious food did not extend to an interest in the other aspects of the business.
“Part of the problem was my dad hadn’t been willing to let go,” Max Puidak said. “He made an amazing product, but he didn’t understand many parts of the business.” Like many entrepreneurs, he knew how to create a product that people liked, but he was not as well versed in the details of the business. (New York Times)
It was fortunate that Max Puidak, who had previously expressed no interest in running to company, decided to take on the leadership role left vacant by his father’s death. It was fortunate that he had the acumen to troubleshoot some of the company’s problems. Hopefully, the future will be bright for Galena Canning.
Plenty of companies have founders who are passionate about their product or service, but not about the other details of running a business. Not every company has a prodigal child who is willing or able to take over in the event of the founder’s death, however. In fact, a recent study showed that up to 70% of owners want pass their businesses to their children, but less than 15% actually do. But in lieu of this time-honored tactic for maintaining the continuity of a business, many business owners have no plan at all.
Succession planning tends to feel like something that can always be put off until tomorrow—until it can’t. As we have written previously, the vast majority of Baby Boomer business owners—and, as reported in Entrepreneur, 60% of private business owners overall—do not have a succession plan in place. As many as 2.5 million owners are expected to retire within the next few years, and this mass retirement, known as the Silver Tsunami, represents the largest generational wealth transfer in American history.
Many owners believe they will be able to find a buyer for their business when the time comes. That line of thinking fails to reckon with the possibility that the time could come unexpectedly, or that the economic conditions at that time could be bleak, or that, even in a stable economy, less than 20% of the businesses that are put on the market ever find a qualified buyer.
Making an Employee Stock Ownership Plan a cornerstone of your succession plan eliminates many of the biggest hurdles that business owners face when trying to sell. ESOPs create a market for your business where one may not have existed before. Better still, the buyer has a vested interest in keeping your business intact and already has a deep understanding of how your company runs and what makes it special, because the buyer is your employees. And the structure of ESOP transactions ensures that you get a fair market value for the company you built.
One common reason that many business owners put off implementing a transition plan is that they are not ready to retire, and don’t want to be pushed out. ESOPs, unlike most other succession options, allow owners to enjoy the benefits of the transition without requiring them to retire before they are ready. You can continue to lead your company for as long as you choose, even after you have been paid in full for the sale. For a prime example, look to Bob Moore, founder of Bob’s Red Mill, who sold his company to an ESOP is still happily serving as president in his 90s, more than a decade after selling the company to an ESOP.
There are numerous advantages to making an ESOP a key part of your succession plan: keeping your company intact; protecting your legacy; tax benefits for you as the seller; tax savings for your business; retirement savings for your employees; the many proven perks of employee ownership such as increased motivation, productivity, and talent retention, among many others. But perhaps the biggest reason to implement an ESOP as a succession plan is something that the tumult of 2020 truly brought to light: ESOPs are resilient.
ESOPs dramatically outperformed traditionally-held companies during the COVID-19 crisis, as well as during the previous two recessions. They were significantly better than their competitors in terms of protecting jobs, avoiding pay cuts and hour reductions, and, even when things were at their hardest, were nearly 6 times more likely to feel that their business would be able to recover to pre-pandemic performance.
ESOPs are defined by a culture of financial transparency, unity of purpose, and a worker-first mentality, all of which are incredible assets in the face of extraordinary challenges. But an ESOP takes time to implement, and that culture takes time to grow. If you wait until a disaster has already struck to decide that you want to build a succession plan around an ESOP, you can’t expect the benefits to somehow apply retroactively.
Many businesses, such as Applewood Seed Company, chose to implement ESOPs in 2020 in order to alleviate the terrible “what if?” question that hangs over a business without a succession plan in place. Applewood’s founder knew that an ESOP would not make them immune to the upheaval of the current pandemic, or to whatever future upheaval may come. But he also knew that it would allow his employees to rest easier, knowing that whatever might happen, the company would be in the best possible position to endure with its name, its jobs, and its way of life intact.
2020 was the toughest challenge many businesses had ever faced, and the challenge isn’t over yet. Make 2021 the year that you protect the business you’ve worked so hard to build. Contact the Menke Group today to learn more about making an ESOP the heart of your succession plan.
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.
