Today’s fast-evolving business landscape makes planning for sustainable growth even more challenging than it was a decade ago. The usual routes to business growth are littered with new obstacles. Leadership for growth demands a new balance of innovative thinking and disciplined adherence to standards and transparency. In short, business growth plans need to innovate for a new and changing environment.
Plenty of business owners think of an employee stock ownership plan (ESOP) as a business ownership transition tool best suited for accessing liquidity and diversifying their personal wealth after a career building business value. They’re not wrong about what an ESOP can do for a business owner who’s ready to sell—but they’re missing out on the strategic business value of being acquired by an ESOP, and the unique ways ESOPs can fuel growth.
When exploring strategic growth plans, leaders often limit their thinking in terms of organic business growth, mergers, acquisitions, and/or finding an external buyer. The ESOP option simply gets overlooked. But becoming ESOP-owned can create unique advantages for a business that’s poised to grow.
Whether an ESOP-owned company has approached you with an acquisition inquiry or you’re considering selling to an ESOP as part of your long-term exit strategy, here’s what you need to know about ESOPs and strategic planning for sustainable business growth.
Key Factors in Any Business Growth Plan
Nearly every business aspires to grow and/or expand. But for that growth to be both meaningful and sustainable, it usually needs to meet certain criteria, including:
1. Action plan for increasing revenue, sales, and/or profitability
To execute on this growth pillar, leaders should focus on:
- Identifying market demands and unmet customer needs
- Refining product or service offerings
- Increasing operational efficiencies to improve margins
2. Focus on increasing business valuation
Boosting overall company value helps to:
- Appeal to prospective buyers and acquisition targets
- Attain better financing terms
- Strengthen position with vendors, partners, and customers
3. Blueprint for attracting and retaining key talent
Crafting an effective talent strategy involves:
- Distinguishing the company as an employer of choice
- Maximizing the benefit of employee excellence
- Minimizing costs associated with employee turnover
4. Goals to increase market share or expand customer base
Widening and deepening the prospect pool may require:
- Tapping into new customer segments
- Expanding vertical presence in an industry
- Leveraging a fresh unique selling proposition
5. Roadmap for the company’s geographic expansion journey
Pursuing growth in new territories can mean:
- Physical expansions to access new markets
- Acquisitions into new areas
- Global market participation
What Does an ESOP Have to Do With Growth Plans?
Let’s start with a quick definition of an ESOP. It’s a uniquely flexible business ownership transition tool, and a qualified retirement plan regulated under the Employee Retirement Income Security Act of 1974 (ERISA).
An ESOP enables a private business owner to access the wealth they’ve built by transferring ownership to an ESOP trust, which becomes the new legal business owner on behalf of eligible employees, who earn ownership stakes over time. When employees retire or leave the company, the company repurchases earned and vested shares, and employees receive the value of their ESOP account in the form of a distribution.
Establishing an ESOP trust generates a friendly buyer for your company that’s guaranteed to pay fair market value. The selling owner can choose to stay involved on your own terms (unlike in a third-party acquisition) and timeline, and continue steering the vision through a long-term succession plan, so the ownership transition doesn’t have to create chaos and uncertainty for employees, customers, or vendors.
Along with the strategic value of a controlled, stable ownership transition, becoming ESOP-owned generates unique benefits that can turbocharge virtually any strategic growth plan:
Tax savings — Most 100% ESOP-owned S corporations pay no federal or state income tax. Think about your corporation’s current tax liabilities. What could your business achieve if those dollars became free cash instead of tax payments?
Ownership culture — If your leaders commit to nurturing employee ownership culture and teach employees how to think and act like owners, they’re more likely to engage more deeply in innovation, continuous improvement, and waste reduction.
Recruiting and retention edge — The added retirement benefit to employees makes the ESOP a powerful magnet for talent, and subsequently incentivizes those excellent employees to stay. Lower turnover means lower recruiting, hiring, onboarding, and training costs.
Governance and oversight — ESOPs are ERISA-regulated, which means company fiduciaries are held to a standard to act in employee-owners’ best interests. This requirement helps ensure prudent and transparent financial management and long-range planning.
Applied to a sustainable growth plan, an ESOP can serve as a turbo booster. The ESOP company’s tax savings improve cash flow, and free cash means more choices in terms of marketing, hiring, research, product development, investment, etc. An improved cash position can open doors to fund initiatives, partnerships, and acquisitions in new regional or product markets.
But just as important, ownership culture promotes innovation and encourages employees to engage in new market development. Employee-owners who understand the link between company performance and their ESOP account value are often more willing to go the extra mile, knowing business achievements and improvements boost the company’s annual valuation. And ownership culture helps minimize bureaucratic roadblocks to speed initiatives’ results.
What About Strategic Acquisitions?
With cash on the balance sheet available for growth and acquisitions, highly engaged employees, and a fiduciary duty to maximize shareholder (i.e. employee-owner) value, ESOP companies make excellent acquiring entities. They’re often in a strong borrowing position, and they can offer a selling shareholder very attractive potential tax advantages that come with an ESOP purchase.
At the same time, an ESOP has to be reflective and disciplined about any business acquisition. Sometimes, what’s best for the company and employee-owners could be a buyout strategy, with an ESOP buyout negotiated in the terms of the sale. Fiduciary responsibilities require comprehensive due diligence and looking out for the shareholders’ best interest, but ESOP companies are attractive acquisition targets, too.
Every business’s strategic growth plan is unique, but few approaches to the ownership transition can offer an ESOP’s flexibility — and none offers an ESOP’s growth-enhancing tax advantages. Learn about this and other ways becoming an ESOP can change a business for the better, including putting strategic growth within reach. To download our free guide, click below.