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1 BUSINESS RETENTION AND SUCCESSION PLANNING WITH EMPLOYEE OWNERSHIP ECONOMIC DEVELOPERS: Enhance your business retention activities by adding an employee ownership program (at no cost to your agency.) Resources in this document: Program Description p2 Company Handout p3-4 Threshold Questions Checklist p5 Next Steps Checklist p6

2 BUSINESS RETENTION AND SUCCESSION PLANNING WITH EMPLOYEE OWNERSHIP ECONOMIC DEVELOPERS: Enhance your business retention activities by adding an employee ownership program (at no cost to your agency.) How does the program work? The National Center for Employee Ownership (NCEO) provides you with all of the resources and training you need to start an employee ownership program at no cost to the agency. Training. The NCEO provides a free in-person, one-day training for economic development officials interested in starting an employee ownership program. Economic development staff members are taught how to discuss succession planning and employee ownership, answer frequently asked questions, and determine if the company may be a good candidate for employee ownership using a simple preliminary assessment. Ongoing Support. When a company shows an interest in employee ownership, the NCEO works with your agency to serve the company s needs. We provide a free exploratory consulting call with the interested company and the agency. We will use the information from the call to create a customized action plan for the company. The plan will detail how the company and agency can work together to determine whether employee ownership is a good fit. Help Building Your Network. The NCEO will identify service providers and employee-owned companies in your state that can work with you to assist businesses interested in ESOPs following the exploratory assessment.. Why employee ownership? The coming tsunami of baby boomer transitions: Across the U. S. millions of businesses will change hands or be closed in the next ten years as Baby Boomer business owners reach retirement age and start seeking liquidity. The consequences: Loss of payroll and spending power. Midsized firms generate billions in annual payroll from $20 to $30 billion in medium-sized states like Wisconsin and Oregon to $60 to $70 billion in larger states like Illinois and Pennsylvania. If even a fifth of these firms closed or moved away, that would be a loss of $3 billion to $13 billion in spending power. Grounding businesses and wealth in your local communities: A state employee-ownership program can educate business owners about their options and about selling to employees through an ESOP. Creating more employee-owned companies: Keeps businesses and jobs in-state. Employee-owned companies are more likely to remain in-state, stay in business longer, and grow faster. Builds community wealth. On average, employees at employeeowned companies receive 5% to 12% more in wages and have retirement accounts that are 2.5 times greater than at comparable companies. And when employees spend locally, that money cycles several times through local and state economies. Supports local businesses. Numerous studies show that, when combined with a participative culture, employee ownership increases corporate performance.

3 COMPANY HANDOUT ESOP Basics What is an ESOP? Employee stock ownership plans, or ESOPs, are a way to sell a business that benefits the company, employees, and the selling business owners. Business owners sell some or all of their shares to an ESOP trust, which owns those shares on behalf of employees. ESOPs can be funded in many ways, but usually the transaction involves a loan. The company can take out a loan and then reloan the funds to the ESOP trust. The company makes contributions to the trust, which the trust uses to repay the loan. Sometimes the person selling the shares provides the loan. Almost all ESOPs are completely company-funded. Employees pay nothing. Financial Benefits An ESOP is funded by deductible corporate contributions to a special employee trust. It is the only way a company can use pre-tax future corporate earnings to buy shares from an owner. Flexibility An ESOP enables you to sell your business at once or gradually in installments. Additionally, you have the option to define your role in the company moving forward. You can continue in an executive role or relinquish managerial duties. Rewarding Employees An ESOP is funded by deductible corporate contributions to a special employee trust. It is the only way a company can use pre-tax future corporate earnings to buy shares from an owner. Is an ESOP right for you? Here are some threshold questions to help you determine whether an ESOP might be a good fit for your company. ESOPs make the most sense for: Owners who want to preserve the legacy of the business they have built Owners who want to (or are at least willing to) see employees broadly assume substantial ownership of the corporation Owners who are seeking liquidity for their ownership interests or who are not seeking liquidity but have a strong belief in the value of sharing ownership with employees Companies that have or are willing to create systems to encourage more employee involvement in decisions about their day-to-day-jobs Companies that want to refinance debt or take on acquisitions in a tax-favored way and are willing to share part of the benefit with employees An ESOP will only work at your company if: It is an S or C corporation It is profitable or has a strong likelihood of becoming profitable soon It has 15 or more employees (except in rare instances) There is successor management in place if current management will be leaving It has the ability to take in additional nonproductive debt or an additional annual discretionary contribution to an employee benefit plan There is no strategic buyer who can offer a very large premium over the value of your business as an independent entity, or if there is, you are willing to take a lower price (note that such strategic buyers are not common) ESOP myths, debunked: ESOPs do not require giving up corporate control Owners do not have to sell at least a certain percentage of the stock ESOPs do not cost more than selling your company some other way ESOPs do not have to cost hundreds of thousands of dollars to set up ESOPs can pay competitive price compared to typical non-esop company sales ESOPs do not only work in certain industries

4 COMPANY HANDOUT ESOPs vs Other Types of Sales ISSUE ESOPS INSIDER SALE SALE TO THIRD PARTY Price paid to owner Determined by outside appraiser based on what a willing financial buyer would pay Negotiated between buyers and sellers, often involving a discount to buyers In a minority of cases, buyer may pay a synergistic value; in most, buyer would pay what a financial buyer would pay Contingencies Generally few if any contingencies on the sale Negotiated between buyers and sellers Contingencies usually required, such as earnouts or financing availability Costs of initial transaction $60,000 to $100,000 for most transactions, more for very complex ones Legal fees for creating contract agreement Legal and accounting fees similar to ESOPs plus often a business brokerage or M&A advisor fee based on a percentage of the deal Can partial ownership interests be sold? Yes Yes Very rarely Continuing role of seller In general, sellers can decide what ongoing role they want Sellers usually can decide what ongoing role they want Buyers determine what if any role the seller will retain Tax treatment of sale Deferral of capital gains taxes by reinvesting in other securities if certain requirements are met Pay capital gains taxes in most cases, but some sale structures will require dividend or ordinary income treatment Pay capital gains taxes. There may be a double taxation of gains if sale is structured as an asset sale (the usual preference of buyers) Funding for the sale Future tax deductible profits of the corporation Employee after-tax dollars, usually paid off over time Buyer s funds Consequences for employees Retains employment and builds wealth throughout the company via the ESOP; layoffs are rare Generally retains employment levels; only the small number of buyers build new wealth In some transactions, particularly with private equity firms, employment costs and numbers are often reduced; on some M&A transactions, target company is closed or moved; in others, employment is reduced as certain target company functions are assumed by parent Sale requirements ESOPs must include at least all fulltime employees who have worked for at least one year as participants in the ESOP trust that buys the company, with benefits allocated by relative pay or a more level formula and subject to vesting Negotiated Negotiated Governance Company board appoints a trustee to vote the shares; sellers may require certain operational covenants as a loan to buy the company is being repaid Negotiated Buying company determines governance

5 COMPANY INTAKE FORM Your Company s Information Your Name: Your Title: Phone: Company Name: Industry/Business Activity Code: Number of Employees: Total Payroll: $ Corporate Structure: oc Corporation os Corporation ollc or PLLC oprofessional Corporation Is your company profitable? Years in Business: Ownership Structure: (Include number of owners, whether they are founders, outside investors, employees, and how much is owned by each)

6 COMPANY HANDOUT Next Steps Contact us to start your customized action plan. We will help you determine whether employee ownership is a good fit for you, and if so, the best way to move forward. All of our services and time are free. We are a non-profit organization; our goal is to increase understanding and awareness of employee ownership as a succession planning tool. STEP 1 STEP 2 STEP 3 Receive a free initial feasibility consultation by calling the National Center for Employee Ownership at Following the call, we will create a customized action plan specific to your company. We will provide support to you and your company as you go through the process of determining whether employee ownership is the right fit. We can help answer your questions along the way, and provide you with resources to help you make the best decision for your company. If you decide to move ahead with an ESOP, or want a formal business assessment or succession plan, we can refer you to a variety of service providers who can help you. Additional Resources These free resources will help you better understand whether employee ownership is the right fit for your company. ESOP Feasibility Webinar Replay: Articles on Employee Ownership: Free Registration to the In-Person Meeting, Is an ESOP Right for You? : Contact Camille Kerr at or ckerr@nceo.org to set up your free registration. You can find more information about the meeting here: