One of the most overlooked yet critical business strategies is succession planning. Business owners know circumstances can change quickly. Economic trends, health issues and buyout offers can catch owners by surprise. That’s why an exit plan is essential. Most business owners still lack an exit strategy, but more leaders are beginning to realize the value of a succession plan.
ESOP: Pros and Cons
The most common exit strategy is selling the business to a third party. It’s typically a less risky strategy than other common options because owners can complete the sale faster and secure more cash upfront than they could from a family member, manager or an Employee Stock Ownership Plan (ESOP). An ESOP is a trust that buys the company from the owner. The employees are the beneficiaries of the trust who purchase an interest or 100 percent of the business over time. This allows owners to remain active in the business as they gradually transition the business to their management team. Company contributions to the ESOP have significant tax advantages, yet they also create additional compliance burdens and could result in a lower overall purchase price.
Owners should seek ways to make their businesses more attractive to buyers. Investments in new technologies, decreases in working capital, business growth and cost-cutting measures can help manufacturers and distributors increase their value. Learn more about ESOPs and how other companies, especially those in the M&D industry are business succession planning by downloading our 2018 M&D Report. Download the report here.