Selling to Empowered Ventures versus Traditional ESOP

At Empowered Ventures, we believe employee ownership is a superior succession option for many privately-owned businesses. Selling to an Employee Stock Ownership Plan (ESOP) provides an owner with a market price for their business along with the peace of mind that comes with transitioning ownership to the employees, who ensure the company continues to operate and support the employees and their families, customers, and local community.

As an ESOP holding company, Empowered Ventures provides sellers with the same benefits of a traditional ESOP transition but uses a different structure. Both are great options. Sellers should understand the differences to determine which best fits their situation.

Under a traditional ESOP transition, a new ESOP must be created to buy the business from the owner, and there are generally 15 steps that must be completed:

  1. Hire an accounting firm to conduct a feasibility study
  2. Hire a trustee to oversee the transition
  3. Hire an ESOP attorney
  4. Hire a seller attorney and other third-party advisors
  5. Hire a valuation firm to conduct a valuation
  6. Negotiate the terms with the trustee
  7. Form the ESOP (plan agreement, trust agreement, etc.)
  8. Hire a recordkeeper
  9. Hire independent, outside board members (best practice)
  10. Execute the transaction
  11. Hire a trustee for ongoing oversight
  12. Hire a valuation firm to conduct annual valuations
  13. Receive seller note payments
  14. Complete Department of Labor (DOL) audit (all new ESOP transactions get audited)
  15. Meet ongoing, annual DOL and IRS testing requirements

In 2010, we went through this process at TVF to complete our traditional ESOP ownership transition (Read more about that here.) Initially, the process was daunting, but we found that the right advisors helped make our ESOP transition relatively efficient and affordable. Every year, many companies pursue a traditional ESOP ownership transition, and if you are interested in this option, we are happy to share more about our experiences and suggestions.

Unfortunately, many owners who like the concept of selling their business to the employees become discouraged by a traditional ESOP after learning about the required process and additional costs. That’s where Empowered Ventures comes in.

As an ESOP holding company, Empowered Ventures already completed the ESOP process and does not need to form a new ESOP to complete a new employee ownership transition. This allows us to avoid 10 of the 15 steps, which significantly reduces the risk of completion and costs.

There can be additional tradeoffs to consider with each employee ownership option.  We know that every business is different, and we want the outcome that best fits each owner’s goals. By either pursuing a traditional ESOP or a transition with Empowered Ventures, an owner is securing their legacy by empowering their employees as new owners of the business, while still receiving market value for their business. It’s a win-win outcome either way.

If you would like our help exploring options, please reach out to us! We would love to hear your story and how we can help.

Tags: ESOP News
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