Is Selling to an ESOP Complex and Expensive?

[Music] support your local businesses is a great movement that most of us have embraced as consumers of these businesses we often see the phrase we are an employee-owned company so as business owners begin to look toward retirement it is natural that they sometimes explore the option of selling their lifelong work to their employees through an esop which is short for an employee stock ownership plan unfortunately these same owners are often told selling your business to an esop is too complex and too expensive don't even consider that so how true is this statement while watching this video you may be surprised to learn that selling your business to an esop is often faster less expensive and no more complex than selling to a third party not to mention the benefits to your employees and your community as well as the tax benefits available to you as the selling shareholder all of which we will cover in other videos in many ways selling a business is similar to something we are all very familiar with that is selling our house experts are hired like a real estate agent a bank an appraisal company to help both the buyer and seller through all of the steps so now let's compare the steps in selling a business to a third party versus to an esop we will start with the steps in selling a business to a third party first the business owner hires a broker or financial advisor to represent their best interest during the sales process next the process of finding a buyer for the business is started like a house sale this involves a lot of time spent in marketing the business to buyers and qualifying them each sale of a business is different but the complexity and cost involved in this step is very often breezed over by selling brokers only to become a large thorn in the business owner's side when the process of searching for a buyer begins to drag out once a potential buyer is found the negotiation process then begins the buyer is represented by a broker attorney or financial advisor who looks out for their best interest during the sale during this negotiation phase a business appraiser is hired to determine an estimated value of the business and eventually the price and terms of the deal are finalized if a bank loan is involved an underwriting process is completed to make sure that the buyer is qualified and able to pay back the loan once all these steps are finished the sale transaction is completed the buyer takes control of the business and the seller receives the net proceeds of the loan of course after the buyer and seller's representatives each receive their commission which is typically a percentage of the sale price business owners are sometimes told that selling a business to a third party is no different than selling a house and that the process is only as complex as the parties make it but what often gets overlooked is the amount of work that goes into marketing the business for sale waiting through the list of potential buyers and then negotiating the terms of a deal with many potential buyers this can be a long and stressful process and even then after all of that work is done the deal sometimes still doesn't go through having a team of experienced advisors on both sides can make things flow much easier and let's be honest here there are plenty of third-party business sales that do go smoothly and there is one last thing to point out because the fees in this type of sale are paid as a percentage of the sale price instead of the business owner writing a check the actual cost of the transaction is often masked and quickly forgotten by the seller now that you know a bit more about selling to a third party let's compare that to the process of selling to an employee stock ownership plan which in many ways is similar to selling to a third party first the business owner hires a financial advisor to represent their best interest during the sale unlike a third-party sale when selling a business to an esop the process of finding a buyer is not necessary and as a result no time or cost is spent on this step this is a major difference between the two types of sales that is overlooked way too often the reason that the search for a buyer is not necessary is because the employees are already a willing buyer through the esop which is a retirement plan created on their behalf during the sale an individual or a financial institution known as the esap trustee looks out for the employees best interest one of the first and most important steps in the sale of a business to an esop is having an independent party come in and complete an appraisal of the business this step is required by law and has become critical in recent years as more business owners explore this employee ownership option the financing terms of the sale to an esop are different for each transaction but frequently both a bank and the seller have loan agreements to finance the deal while negotiations between the seller and the esop trustee certainly take place the process is typically much quicker and less adversarial than a sale to a third party once the deal closes the esop becomes the official owner of the business but typically there is a little to no change in the day-to-day management of the business the seller receives the proceeds of any bank loan and there are no commissions paid instead fees are invoiced by each provider of services and they are paid along the way or after the transaction is completed the process of writing checks for fees makes the cost of services real for the seller and for that reason selling shareholders typically remember those costs making it seem more expensive than it does if paid by a commission business owners are often told that selling a business to an esop is complex and there is some truth to that statement but with the employees identified as willing buyers the time and cost in marketing the business for sale is not needed and as long as the appraised price is within the seller's range the negotiation between the parties can be easier than a third-party sale very rarely do transactions between a seller and the esop trustee fall apart at the last minute the rules involved in creating an esop can be difficult to understand which is why hiring an experienced team of experts who know these rules backward and forward is very important the department of labor and irs both have oversight of this type of sale and when the rules and regulations are not followed that is when the complexity and risk increase quite a bit this chart shows the similarities and differences between the two types of sales the seller and buyer are both represented by experts in their field with the trustee representing the employees in a sale to an esop when it comes to protection for the buyer and seller state and federal laws are always involved with the esop transaction adding rules and regulations from the department of labor and irs as pointed out a few times earlier the marketing involved in selling a business does not exist when selling to an esop this saves a lot of time and effort as compared to a third party sale one of the main differences between the two types of sales is the manner in which fees are paid with commissions being paid for a third party sale and out of pocket costs billed for the sale to an esop and last and probably most important there is some degree of complexity involved in every sale of a business regardless of the type of sale to sum it all up selling your business to an esop does involve some complexity and expense but so does the sale to a third party the complexity in each type of transaction is of a different nature a third-party sale involves extensive marketing tough negotiations and lots of things can happen including possibly never finding a suitable buyer the sale to an esop involves no marketing due to an already identified buyer but it brings in the complication of irs and department of labor rules which cannot be taken lightly having an experienced team of advisors guiding you through the process is important no matter how a business is sold and despite many advisors feeling differently the fees involved in selling a business to an esop might actually be less than selling to a third party especially as the sale price increases there are many benefits to creating an esop that we have not talked about here today that warrant exploring the option of selling your company to an esop while taking this step is not suitable for every business owner you should not just outright dismiss the idea because of any perceived complexity or expense instead take time to learn more about the employee ownership model and determine which option aligns with the goals that you set for selling your business [Music] you