Legacy and groceries:
A lesser-known reason to use an ESOP succession plan
By Mike Frommelt, KeyStone Search
November 4, 2021
When it’s time to sell your business, should you really consider an employee stock ownership plan? Afterall, many accountants and attorneys will claim you’ll never get top dollar for the business if you sell to your employees.
While this is not true in many cases, there are strong opinions out there that selling to an ESOP (employee stock ownership plan) is less lucrative than other options.
I’m not going to argue on the numbers because, quite honestly, I’m not qualified to do so. I’m not a transaction expert or a financial/tax expert. I’m an executive search guy; a “headhunter” if you will.
However, having spent the better part of 30 years working exclusively with private business owners and running a specialty practice working with ESOPs, I have seen some “stuff” and have some opinions of my own.
I’m going to toss out a different reason to consider an ESOP, but first a question. After you retire, do you plan to eat or to buy groceries? If you answered yes, you should be considering an ESOP.
Looking beyond the sale
At this point, I’m sure you’re wondering if I’m crazy, or if they’ve finally legalized marijuana here in Minnesota. Hopefully I’ve at least gotten your attention, so hang with me a few more minutes while I tell you a story that will hopefully explain.
A particular (former) business owner I’ve gotten to know (we’ll call him Stan) sold his business in 2015. Stan was 63-years-old at the time and had built a solid manufacturing company. He grew it from $2 million to nearly $60 million during the 30 years he owned the business. The company (we’ll call it ABC) was based in the town where he was born and raised, a community of about 25,000 in north central Minnesota.
As Stan neared age 60, he was getting tired of the business and just plain tired. So, he sold to a strategic buyer when he was 63 and got out. He walked away with a nice chunk of change for a comfortable retirement. Given that Stan lived in this town his whole life and his grandkids were close by, he decided to stay in the community — at least in the summer. In the winter, he and his wife spent two to three months in Florida.
In one of my conversations with Stan a few years ago, he mentioned the toughest thing for him to do in retirement was going grocery shopping. “What do you mean,” I asked. “Well, when I go to the grocery store, I run into my old employees. They tell me how much the business has changed and how they miss the old days when I was in charge.” Apparently, the buyer of the company moved the headquarters, eliminating multiple jobs. Also, the new CEO was not very respectful to employees.
“I drive almost 30 miles to buy groceries just to avoid the guilt,” Stan said.
Of course, it’s not Stan’s fault jobs were eliminated. Businesses change and cultures change as well. Yet, even though no one was ever outwardly angry or rude with Stan, he couldn’t help feeling guilty. In fact, many former employees congratulated him on selling the business. But despite all the nice comments, Stan couldn’t help but feel that somehow he had let them down and their comments were most likely just “Minnesota nice.”
Businesses and community are interconnected
This obligation and guilt are really the crux of my argument. Almost every business owner I’ve gotten to know — and there are hundreds of them — are incredibly intertwined with their businesses. Everything is personal. Vendors, suppliers and even competitors become friends. Employees are not simply cogs in a machine; they are also friends, colleagues and become like family.
These owners and their companies also become key parts of their communities. Other businesses exist to meet the needs of the employees who live and work there. The schools are filled with the children of their employees, and the owner knows many of these children by name.
For an owner, simply selling their company and riding off into the sunset is almost impossible. There’s just too much wrapped up in it — for many it’s heartbreaking.
Unfortunately, I’ve had conversations with many former business owners who regret how, or to whom, they sold their companies.
By contrast, owners who sold to an ESOP usually have better stories to tell. It’s a fact that when a company is sold to its employees, it is much less likely to be relocated or scaled back. Also, those same employees who helped the owner reach his or her dreams are better positioned to reach their own dreams.
“Legacy” is a bit of funny term. When I hear it, I think of the multiple oil paintings of the founder in the various conference rooms of a large company where I was employed. I guess that’s one form of legacy.
Personally, I think a better legacy is building a great company with a bunch of great employees and then turning it over to them to carry it forward. Of course, this includes at least a little pot of gold for yourself as well.
Oh yeah — and feeling OK buying groceries in town.
Mike is the CEO at KeyStone Search, which serves mid-market, privately held companies. You may reach him at mikef@keystonesearch.com, or 612 375-8986. www.keystonesearch.com
The Minnesota Center for Employee Ownership serves as a free unbiased source for education and resources around all forms of employee ownership. With 52,000 business owners over the age of 55 in Minnesota exiting their business in the next 3–5 years, there is a crisis looming. What will happen to their legacy, employees, community? Business owners will look to their advisers on how best to exit. Contact us for more information on how we can be a resource for you at www.mnceo.org or Sue Crockettt, executive director at scrockett@mnceo.org.
