Becoming the Client: Why an ESOP Attorney Chose to Sell His Company to an ESOP

Author: David Solomon

Remember that ad for Hair Club for Men from a few years ago with the slogan “I’m not just the president, I’m a client”? Well, the same can be said for me and ESOPs. I’m not just an ESOP lawyer, I’m also a client.

When The Schebler Company, a business in which my family and I were investors, was considering ownership succession options, everything was on the table. We considered a strategic buyer and financial buyer, as well as an employee stock ownership plan (ESOP), which is a qualified retirement plan that gives employees an ownership interest in the company while also providing tax benefits to the selling business owners to purchase the company.

Schebler has been operating in the Quad Cities for over 100 years, and as stewards of the business for the last 20+ years, the current investor group wanted to know that the business could remain a sustainable part of the community for many years to come. 

We were also interested in offering the employees of the company the ability to secure their financial futures. Giving them the opportunity to participate in the ownership of the company after the sale was a key motivation for choosing to use an ESOP. Not only did it provide an exceptional benefit to employees, but it also provided the exit the current investors were looking to accomplish in 2021.

In an article in the Quad Cities Business Journal, the company’s CEO Jim Anderson stated, “This is so great for the employees, especially the younger people in the company – what a great retirement plan…I think the investors could have made more money off of a strategic buyer or a financial buyer, but there was a high likelihood [Schebler] would be broken up and portions would leave the Quad Cities.” 

Schebler was a good candidate for an ESOP, but that doesn’t mean it works for all companies. Companies with very little or no debt with stable cash flows are the best candidates for ESOP as an ownership succession tool.  Having an established management team in place or the motivation to add management talent to supplement what the owners already bring to the table is also of vital importance.

Before considering an ESOP – or any M&A transaction, for that matter – the owners/investors need to consider the company’s resources for doing a deal alongside the goals of the investor group. An ESOP is not right for every situation, but when it aligns with the goals of the ownership group to remain involved in the business after the sale and to ensure that the business can continue to operate independently after the transaction closes, an ESOP is an excellent option.

Unlike Schebler, which had an ESOP attorney as one of its owners and a member of the board (cue the “I’m not just an owner, I’m also a client” mantra), not all companies have access to the right information about how ESOPs work. Many companies lack the team or resources necessary to design an ESOP transaction that will be a “win-win” for the owners and the employees. When considering an ESOP, my advice for business owners is to take advantage of the groups like the National Center for Employee Ownership or the ESOP Association and experienced professional ESOP advisors so you can get help determining whether an ESOP is the right strategy to transition the ownership of the company.

To learn more about ESOPs, visit our website here.