SALES & MARKETING SELLING IN THE NEW NORMAL
The Potential Benefits of ESOPs as a Succession Plan Rather than selling to another company, many members are selling to their employees BY STEVE GUGLIELMO
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cross all industries, companies are facing a generational shift that is impacting their entire organizations. As C-suite executives and owners reach retirement age, they are faced with a question of what to do with the business. At the Seven Springs Regional Meeting, Meritus Vice Chairman Rob D’Allesandro laid out what he describes as the five alternatives to selling the business outright, ranking them on a spectrum from staying independent to an outright sale. Those options included an Enhanced Supply Relationship, a Joint Venture with another Distributor, an Employee Stock Ownership Plan, a Partnership with an Equity Sponsor/Partner, and an Outright Sale. In recent years, an increasingly popular option is the ESOP. One of the reasons ESOPs have become so popular is that owners may worry about what will happen to their employees under new ownership, if they choose to sell the business in order to retire. In an ESOP, those employees now become part of the ownership group, giving them a stake in the success of the business and the company a potential recruiting and retention competitive advantage. ESOPs are especially attractive to companies who may not have an in-house successor who is prepared to step into a leadership role or may not be financially able to purchase the company from the retiring owner. Such was the case when Oxygen Service Company’s original owners were set to retire in the early 90s. “Our two original owners were Bill Lund and Bill Huber,” says Oxygen Service Company President Ryan Diekow. “One of the decisions they made as business partners was not to bring family into the business. So, when they got to the point of retirement, they were at a bit of a crossroads. Do they sell to one of the large distributors out there, or do they go down this employee ownership road? They decided to actually take less for their business but reward the folks who had been loyal 66 • Fall 2021
to them and helped them build the business over the years. It was an exciting opportunity for us, as employees. And it’s exciting because Bill Lund still comes around the business today. He’s extremely proud to still be associated with Oxygen Service and to leave the employee ownership legacy.
ATTRACTIVE BUSINESS QUALITIES According to an article from Rivero, Gordimer & Company CPAs and Advisors, there are several qualities to help owners determine if an ESOP could be the ideal exit solution. This list includes: • Company has strong cash flow • Company has a history of increasing sales and profits • Company is in a high federal income tax bracket • Company is not heavily leveraged and has substantial stockholder equity • Company has capable second-line management in place • Company has 30 or more employees • Company has more than $5 million in annual sales. The article goes on to say, “In addition to analyzing the financial aspects of an ESOP as an exit strategy, it’s also important to consider the employees. Proponents of employee ownership emphasize the incentive and team-building advantages of paying employees in part with employer stock. Critics argue that concentrating employees’ financial resources in their employer’s securities increases their exposure to their employer’s fortunes. The future success of the company will be partly dependent on the employee culture and mindset. The ESOP Association performed a study of its members and found that most of its members reported increased productivity and improved employee morale. A study by the National Center for Employee Ownership found that ESOP companies grew more than 5% a year faster than their non-ESOP counterparts.”
