Are ESOPs in Your Business Retention Toolkit?
Written By Lawrence Bivins & Patrick McHugh, PhD
In both good times and bad, communities rely on a diverse blend of small, medium and large employers for economic stability and growth. Moreover, the International Economic Development Council (IEDC) has long claimed that 80% of net job-creation is derived from companies already in a community.
In addition to uncovering opportunities, Business Retention and Expansion (BRE) programs serve as “early-warning systems” for economic development organizations. Among the red flags to look out for at closely-held businesses is succession planning. While building a business with lasting value is the hope of every entrepreneur, fewer than one out of every four private companies report having a formal succession plan in place, according to the National Association of Corporate Directors.
Much of the value economic development professionals add to their business communities is access to accurate information and trusted expertise at key moments in the life of local companies, and rarely is a moment more pivotal than when the owners decide it’s time to retire. In the absence of a ready buyer or waiting heirs willing and capable of assuming ownership, some profitable firms simply close their doors. Employee Stock Ownership Plans (ESOPs) are a viable option among the range of succession solutions. While BRE managers don’t need to be experts in the intricacies of these programs, they should be knowledgeable enough about them to articulate their benefits and refer business owners to the appropriate resources.
ESOPs offer a proven path for keeping companies open and locally-owned. Many of the roughly 6,600 ESOP companies in the United States started life as conventionally-owned enterprises but shifted to becoming partially- or wholly-owned by their employees. Leveraging ESOP buyouts as a succession strategy is particularly timely as the “silver tsunami” of 2.4 million business owners in the Baby-Boom generation reach retirement age. Even in the case where a remote or foreign buyer may be interested, ESOP buyouts can preserve a company’s local roots, making it less likely the firm will be dismantled and re-sold for parts or be lured away to a competing destination. ESPOs cannot save every business, but such buyouts can preserve viable companies that may otherwise disappear from the communities where they were founded.
But ESOP buyouts are not just emergency room economic development; they can make an economy stronger and more resilient. A significant body of research shows employee-owned businesses regularly outperform conventionally-held firms in ways that make regional economies healthier. Compared to other companies, employee-owned firms add jobs faster, post more robust sales growth, achieve greater productivity gains, and are less likely to lay workers off during recessions. In addition to the equity that employees put away for retirement, ESOP companies also pay higher average wages, which boosts consumer demand more broadly. That’s a recipe for a more competitive, durable and self-sustaining local economy.
The process of shifting ownership to an ESOP takes time, so it is important to engage business owners well before they hang up the spurs. Most ESOP buyouts generally take at least a year from the time a business owner starts to explore the option until the deal is finally consummated. As such, BRE managers can play a vital role by introducing the concept to business owners and connecting them to resources while there is still time to successfully execute the transaction.
North Carolina has seen several successful ESOP buyouts in recent years, and with the looming retirement of the baby boomer generation, employee-ownership succession is a BRE strategy whose time has come.
[Patrick is a senior economic analyst at the North Carolina Budget and Tax Center and a board member with the North Carolina Employee Ownership Center. He will present on ESOPs as part of NCEDA’s existing-industry toolkit series at the Annual Conference on June 12 in Beaufort.]