Tom DeSimone, Director at Prairie Capital Advisors, Inc, joins to share the shifts his team witnessed during the pandemic, and how focusing on 2021 and not 2020 to ensure stability in your company.

Employee-owned businesses have experienced significantly fewer issues with employee retention than their non-employee-owned counterparts. I can’t remember a time in my career when employee retention was talked about more often than it is now. Even personally, I’m one of those Great Resignation statistics. In late 2021, I resigned from my position in local government to take on the role of Executive Director of Missouri Center for Employee Ownership, Inc. (MOCEO). Like many members of the American workforce, the pandemic pushed me to reevaluate my personal and professional priorities. So, when I joined MOCEO, I was very interested to learn what effect employee ownership had on employee retention. So, as soon as my second week of work, I began asking every executive of an employee-owned business I met, how their business model impacted retention. With very few exceptions, the general response was that retention wasn’t a significant issue.

As you know, there are a lot of “moving parts” in the day-to-day management of a business. Between dealing with people, improving profitability, tracking inbound and outbound flows and financial reporting, you may not have much time to think about your company’s ownership mix. Whether there is a single owner or multiple owners, made up of family members or not, sooner or later the topic of ownership transition may come up. When it does, it can be a stressful conversation. However, it is a conversation that is ultimately inevitable. There are any number of reasons why business owners decide it’s time to consider who the next owners of their business should be, whether the successors are family, managers, employees or a third party. All companies, however, ultimately go through an ownership transition process. The issue is whether it is planned for or an after-the-fact reaction to something. What our experience tells us is that proactive planning for ownership transition leads to outcomes that are almost always more satisfying. Time is the valuable commodity in transition planning. The more time you have the better things will be.

Liquidity options are plentiful for business owners: strategic sale, private equity, management buyout, family transfer, and leveraged recapitalization. Which path should you take? We know that 42% of the 2021 Great Game™ All-Star companies and many others walked a different path—implementing an Employee Stock Ownership Plan (ESOP). Apart from the fact that ESOPs can be a great exit strategy for open-book companies, here are the top five reasons why open-book management companies should consider an ESOP.

Using an ESOP for Business Transition Can Be Complicated, But Selling to an Outside Buyer Is Often Uncertain and Even More Complicated with Less Flexibility and Fewer Tax Benefits When people describe the pros and cons of ESOPs, often they note that the plans are complex. ESOPs are somewhat more complex than 401(k) and similar retirement plans and do cost substantially more to install and somewhat more to operate, mostly because an annual appraisal is required for closely held companies. But ESOPs are not more complex than selling to a third party. The table below compares what issues come up in the sale of a company to an ESOP compared to a sale to a third party. It was prepared with the advice of professionals who have done both kinds of transactions. The table indicates that the overall level of complexity is similar, but ESOPs are much less risky in terms of the likelihood of finding a buyer. They are also considerably less costly, mostly because in the case of a sale to a third party, in addition to substantial legal, accounting, and sometimes other fees, the price paid to the seller is usually reduced by brokerage commissions paid by the buyer.  Sales to third parties also do not qualify for special tax benefits, as is the case with ESOPs.

    In October 2019, Rick Hedden retired from SRC after 36 years. He was 59 years old. At the time, his shares in the company’s ESOP plan were worth seven figures. But the lessons he learned from playing the Great Game of Business over his career at SRC might be even more valuable. It helped him live his version of the American Dream. Here is his story.

The War for Talent is now in full swing. As the economy continues to reopen, companies have begun hiring again in earnest—driving the unemployment rate closer to pre-pandemic levels. At the same time, the number of open jobs in the U.S.—an estimated 9.2 million—is now breaking records. It’s one of those rare times in recent history where the number of job openings exceeds the number of unemployed people actually looking for a job.

Ben Franklin famously said that the only things certain in life are death and taxes. But that’s only because ESOPs weren’t invented yet. With all the news about President Biden’s proposed tax changes grabbing headlines these days, I was reminded about a story I wrote a few years ago that was published at Forbes.com.

  The Company's Largest Shareholder Think about how most people you encounter daily don’t really enjoy waking up and going to work every day if they go at all. When many (or most) people reach a certain age, they find it more comforting to think ahead to retirement than focus on what they might need to do that day at work. And yet there is an associate at our company, SRC, who still chooses to come to work even though he’s seventy-one. His job on the factory floor pays him about $31,000 a year. He doesn’t continue working for the pay; he shows up every day because he sincerely loves his job.

When it comes to deciding upon an exit strategy, owners of closely-held businesses have a lot to think about. Faced with the frightening prospect of turning over the business they have worked so hard to build to new ownership, they might worry about what will happen to the company – and their employees – once they’re gone. Selling the business to a third party isn’t always a welcome or viable option. But if there isn’t a qualified management team or successor in mind, what’s a business owner to do?