Being Acquired by an ESOP Company Toolkit

The Being Acquired by an ESOP Company Toolkit has been developed to help companies considering an alternative path to employee ownership.

You have a lot of choices when selling the company you have worked so hard to build. You might be able to sell to another company or a private equity firm. Or maybe you have key employees who have the funds and risk appetite to make an offer. Selling to an outside buyer, however, involves the risk that they might not keep all your staff, might move your company elsewhere, or might not be true to the values you built into your company.

Maybe you have looked at creating an Employee Stock Ownership Plan (ESOP) for your company, but found the costs and complexity to be more than you want to take on or you discovered that to finance the deal, at least some of it needs to be in the form of a seller note, and you really would like to get the money up front.

Selling to a company that already has an ESOP may be an attractive alternative. There are a lot of potential benefits:

• The ESOP company can pay a competitive price for your company.
• The transaction costs of selling to a company that already has an established ESOP may be paid for by the buyer, although this might be factored into what the buyer pays.
• Depending on how the deal is structured, you may be able to get a tax benefit on the sale.
• Your employees will generally become participants in the ESOP of the buyer, at no cost to them.
• ESOP company acquisitions have a strikingly successful track record. Research shows these acquisitions are much more likely to succeed than acquisitions by other buyers.
• Employees at ESOP companies are laid off at one-third to one-fifth the rate of other companies, have about three times the total retirement assets, and have far lower turnover. While every acquisition will be different, selling to an ESOP company is much more likely to result in your employees being better off than selling to any other buyer.

This toolkit will help you decide if, given your goals and the current situation of your company, a sale to a company with an existing ESOP is a strategy worth investigating. It includes key decision factors, research highlights, case studies, and many links to resources where you can learn more.

To evaluate whether selling to an ESOP company is the best path for your business, you need to weigh it against the alternatives.  If you already know that you are committed to employee ownership in some form, Who Should Own Your Business After You? is a good introduction to the universe of ways in which a company can be employee-owned. If you want a broader perspective that includes non-employee-ownership approaches, take a look at our web article comparing forms of employee ownership or read about how Michael and Lynn Terry weighed those options when they faced their own exit from Cimarron Trailers.

More frequently, however, we hear of companies trying to decide whether to set up an ESOP for their own company or to sell the business to a company that already has an ESOP (see, for example, this case study of Valley Honda, whose owner faced exactly that choice). In order to make that decision, you need to understand the basics of how ESOP transactions work. Here is an article on creating a new ESOP vs. selling to an existing ESOP company that is specific to company owners evaluating this.

(You can also read our article that compares selling to an ESOP versus selling to a conventional company.)

After you understand the basics of an ESOP transaction, read through the factors that will help you determine if setting up your own ESOP is a better fit than selling your company to a business that already has an ESOP.

Selling your company to an ESOP company can be much like a sale to any other company. You either sell your shares, or the company sells its assets to the buyer. Or, in some cases, you may first set up an ESOP in your own company and sell your shares to that ESOP. You will pay whatever taxes are due, and the specifics of the companies and the transaction structure will have a large impact on those taxes. No matter how the transaction is structured, the employees of your company become employees of the buyer and will generally become participants in the buyers’ ESOP and other benefit plans. More details on the financing, typical structures, taxation, and impact of C corp and S corp status are in Structuring a Sale to an ESOP. 

This webinar explores the strategy, communications, and practical considerations of selling your business to a company that already has an ESOP.

In any transaction, there will be multiple integration-related concerns with the new company, including management roles, technology, facility utilization, etc. A well-structured deal needs to have an integration team set up with members from both companies to manage all the issues described in the Integrating Two Companies: The Firstar Case Study. This will take time to work out. The article Acquisitions and Integrations, Who You Gonna Call? highlights one acquiring company’s experience in this area. Fortunately, the research on this topic demonstrates that not only do ESOP companies have a competitive advantage in general , but research on acquisitions by ESOP companies also shows that they tend to have better outcomes for employees and companies. The case study of Cimarron Trailers shows what that integration—and success—look like in practice.

In addition to tackling the core employment issues, one of the biggest factors in making an acquisition productive is the announcement to both workforces. The initial impression will cover everything that follows.

If all of this seems like it is worth exploring, how do you find an ESOP company to sell to? Just going to a business broker or M&A advisor probably won’t help—they are unlikely to know which firms are ESOP-owned. In this toolkit, we have listed a number of ESOP companies that are actively seeking to make acquisitions, along with a number of ESOP advisors who specialize in ESOP M&A work. That’s a good place to start. 

You can also obtain a list of ESOP companies from the NCEO. This list is based on the filings these companies are required to submit annually to the Department of Labor. The list includes information about industry, location, and the number of active ESOP participants (a reasonable proxy for the number of employees).  Finally, you can contact us about how to obtain a list of acquisitions reported in the press by ESOP companies.