How an ESOP Can Help Solve Family Business Succession Planning Problems

Posted by Aaron Juckett, CPA, CPC, QPA, QKA on Tue, Jul 20, 2021
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When it comes to running a family owned business, succession planning is an often overlooked yet essential consideration. In fact, many family companies don’t last beyond a single generation. For those that do, succession planning is a must.

But the subject of ownership transition can be thorny in a family firm, and the issue can become even more complex when some children prefer to remain involved in the business while others pursue their own interests.

For the owner-seller of a family business, succession planning often has to achieve more than liquidity and an exit strategy. Retaining ongoing control through the succession transition is critically important to the health of the company — yet, the value of family harmony cannot be overestimated.

So, how can an employee stock ownership plan (ESOP) help owners structure succession in the family business so that everyone stands to gain equitably? 

Let’s examine some of the issues surrounding family business succession planning and how an ESOP can provide a solution to many of the biggest obstacles to successful family business succession. And, we’ll take a look at a real-life example of a family business that successfully transitioned to an ESOP.

Questions Arise in Family Business Succession Planning

While family business owners invest their capital, time, expertise, and often heart and soul into their businesses, only a third report that they have a clear, documented succession plan in place.1 In fact, it’s often the day-to-day demands of the business that can keep owners from dedicating the time and effort to succession planning.

Selling to a third party, whether that means selling to outsiders or to children, can be complicated and unpredictable, and the tax repercussions can cut deeply into the sale price of the business, reducing both the liquidity realized by the seller and the inheritance of the children in the longer term. And that may be in a best case scenario in which all parties agree.

Common questions around family business successions can include how to:

  • Equalize inheritance when not all children share an equal interest in remaining involved
  • Realize liquidity to retire when children can’t afford to buy the business
  • Control the transition process and ensure children are adequately prepared to lead the company
  • Address tax burdens if ownership stakes are sold to fund retirement

In addition to these potential complexities, many business owners may also worry about setting up potential conflicts between siblings, and how to structure a succession plan that’s equitable for everyone — including, in many cases, employees who may have come to feel much like family, too.

Fortunately, an ESOP sale can be structured to meet all these complex demands.

How Can an ESOP Address Issues Specific to Family Businesses?

For the owner-seller, an ESOP offers flexibility that a sale often can’t, including the liquidity needed to support retirement, indefinite deferral of capital gains tax on the sale, and a controlled exit that can allow for a smooth leadership transition.

But what about the children who stand to inherit the business? And, what if some want in and others want to cash out? 

Selling to an ESOP creates a buyer, and because the owner-seller realizes fair market value and liquidity at the sale, they can choose to incorporate purchase warrants for involved children and use gifts of equivalent value for children with divergent interests. Both “types” of children receive equitable value in terms of their inheritance, and future conflicts are avoided by ensuring that uninvolved children do not have ownership stake in the business.

In addition, an ESOP enables the seller to remain involved in day-to-day operations throughout the transition to new leadership. This provides time to ensure that children who would take over leading the company are properly prepared. It also provides ample opportunity to communicate the benefits of the ESOP to employees and to nurture cultural continuity that promotes business stability for years to come.

Family Business Succession Planning Case Study: Hi Nabor Supermarket

Sam and Francis Crifasi founded Hi Nabor Supermarket in 1963 in Baton Rouge, Louisiana. This three-location grocery chain offers regional specialties in its bakery alongside homegrown produce and Louisiana seafood, and occupies a special place in the community it serves. Sam passed away in 2014; in 2020, Francis died.

The nine Crifasi siblings were co-owners of the supermarket chain, and most remained involved in the business for many decades. The second generation family members completed the sale of their company to an ESOP in March 2021, creating an opportunity for a smooth exit for those who are now looking to retire, yet holding space for those siblings who want to remain on and support the ownership transition and succession process.

Jim Crifasi, Hi Nabor CEO, says, “It keeps our management team together and gives all my brothers and sisters an exit strategy without putting a strain on Hi Nabor.”

In addition to making retirement possible for the Crifasi siblings, the ESOP is a qualified retirement plan for all Hi Nabor employees, providing an added source of wealth as an employment benefit that doesn’t require employee contribution.

Hi Nabor was also strengthened by the tax-related benefits of the ESOP sale, which provided a competitive advantage at a critical time during the COVID-19 pandemic, when the supermarket offered staff incentives to support ongoing operations, which also increased operating costs in an industry that operates on thin margins to begin with.

Jim Crifasi believes that Hi Nabor’s ESOP structure helps the company compete for talent, with an added qualified retirement benefit that comes at no cost to employees. “It’s also a great deal for our employees and will continue the legacy my father set up in 1963.”

Planning is Key to Exit Strategy Success

Before committing to any succession plan, it’s vital for family business owners to understand how their options stack up, and what’s needed to successfully prepare the business for whatever lies ahead. You’ll get a clear understanding of your exit strategy options when you download our eBook, Your Ultimate Guide to Business Exit Strategies. Just click the link below to get your free copy.

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SOURCE

1PriceWaterhouseCooper, 10th Family Business Survey—North American Report: An approach for lasting family business success, 2021.

Topics: Studies and Statistics, Employee Stock Ownership Plan (ESOP), Business Succession Planning

Aaron Juckett, CPA, CPC, QPA, QKA
Written by Aaron Juckett, CPA, CPC, QPA, QKA

Aaron is President and Founder of ESOP Partners and provides implementation, administration, and consulting services to hundreds of companies. He is a member of The ESOP Association (TEA) and the National Center for Employee Ownership (NCEO).

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