Most owners of privately-held companies are also the founders. Why? At some point in the past, they had a dream and a desire to own their own business. For many, this required giving up a secure job working for someone else and entering the uncertain and ambiguous realm of an entrepreneur. Although there was a huge risk, they believed in themselves and their dream, and they took the leap. For many, this required using their own savings, as well as putting their house and everything they owned on the line as collateral. This was not an easy decision on their part.
During the growth of the business, owners give up huge amounts of their personal and family time, and live on reduced cash flows (sometimes no cash flow) just to ensure their employees get paid. Any extra money that is created is put back into the company to grow it. Studies indicate that the first 5 years of business are the riskiest. Yet with some luck, dedication, hard work, and a keen eye for hiring the right people, the business owner creates a sustainable business.
At this point the owner starts to think about reaching new levels of business growth. A major contributing factor is the ability to attract and retain top-notch employees. There are a variety of ways to do this, one of which is a profit sharing program. The intention is good, but usually there is a lack of clarity about why or how the bonus is calculated. Because the employees don’t understand it, the program becomes unsustainable – the employees think and feel they are entitled to it, regardless of their performance or the performance of the company.
Somewhere during the growth of the business, the owner realizes he or she needs to consider when and how to transition out of the business.
An ESOP (employee share ownership plan) is one alternative that is much less understood than simply selling to a third party. To top that, studies have shown that 3 out of 4 business owners are not interested in having their employees as co-owners. Why?
One of the reasons for this is that many business advisors (such as accountants and lawyers) will dissuade the owner from selling to employees because it is something they don’t understand. In our opinion, the owners have been misguided due to ignorance about how to set up a properly functioning ESOP.
Another issue for owners is the fear of sharing financial information with their employees. This perceived lack of trust in the employees stems from a misunderstanding about the power and potential of the employees. When employees are engaged through proper education and information sharing, higher levels of productivity and profitability are the result.
If 3 out of 4 are not interested in selling to employees, what about the other 1?
This owner looks at an ESOP as an opportunity to engage employees, grow the business, and provide a successful transition plan too. This person knows that ownership is a special gift that most employees will never experience. This owner knows that an invested and engaged workforce will create a much bigger pie of wealth and success for everyone. This owner remembers and understands the struggle and sacrifice that was required, and also understands that the employees have been a large part of creating the success. Therefore, there is a desire to share the success with those who are committed and dedicated to the business. Absolutely there will be a risk and possibly struggle for the employees who buy in, yet not likely to the same degree as the founder’s experience many years ago.
And finally, this owner wants their business to continue to succeed into the future, and knows that the employees are in the best position to ensure that legacy.
Since 1995, ESOP Builders Inc. has assisted over 160 of these owners, or ownership groups, to design and implement successful ESOP programs for themselves and their employees.
Their dreams and passions for long-term successful business legacies live on.
By Perry Phillips, President and Founder of ESOP Builders Inc.