By Rachel Puryear
Did you ever have a favorite restaurant or store you used to love to go to – and then one day, it changed ownership, and it totally sucked after that? We’ve all been there.
When original owners of a company build a successful business, they work hard to retain dedicated employees, and to provide great products and services to their clientele. However, when owners sell a business to retire; often the third party that takes over the company destroys it by implementing all of kinds of cost-cutting measures. This tends to drive out great workers, and tank the quality of products and services. Or, sometimes the third party just acquires the workers and strips the company of its talent, to plug them in elsewhere. Then they just let the whole ship sink. Either way, a third party buyer often ruins a once-great company.
Knowing this, a dilemma that many closely-held business owners face is what to do with the company when they retire. On the one hand, they’d like to actually retire, and that’s certainly understandable. On the other hand, they (hopefully) don’t want the company to fall apart.
The company Lullabot used a win-win solution to this question when it became an Employee Stock Ownership Plan (ESOP) company when its original owners retired, at the beginning of January 2021. Now, a year later, Lullabot’s leaders shared their experience.
Here is a quick summary of the interview:
First of All, What is an ESOP?
Basically, an ESOP is formed where a company’s employees acquire ownership of the company through owning shares of its stock, subject to specific rules. (Note that it must be set up correctly in order to get the tax benefits.)
How Lullabot Benefitted From Becoming an ESOP
- The company was able to transfer ownership to their employees with some tax benefits for both sides, and also without the employees having to purchase the stock upfront.
- Preserving the company culture that was built over time, and continuing to provide the established level of service to clients and customers.
- Gives employees a share of the company they helped build, financial rewards of ownership, incentives to stay longer and perform at their best, and maintain the tight-knit workforce.
- The owners were able to retire with the peace of mind that the company would maintain its quality.
- An ESOP is designed to benefit everyone involved in the transaction. Lullabot’s owners felt that even though they might have gotten more from a third-party seller, what they got for making the company into an ESOP was fair. They felt that the process does make the owners whole.
Challenges Lullabot Faced in Becoming an ESOP
- It’s a lot of work to get it set up, and must be done correctly. (Lullabot’s owners thought it was well worth it, though.)
- ESOPs are only for United States employees. Therefore, it a company has employees outside the U.S. (which Lullabot does), it gets complicated. Lullabot has still not resolved this issue, but is considering ways to possibly create a phantom stock.
- Lullabot self-financed the debt required to make the transition, but any company pursuing forming an ESOP will need to figure out how to finance it.
- Lullabot created an internal committee to take care of ongoing ESOP-related matters.
When asked whether they would choose to make Lullabot an ESOP again if they had to do it all over, the company’s owners unequivocally said…yes!! That, in itself, speaks volumes.
Thank you, dear readers, for reading, following, and sharing. Here’s to win-win solutions!
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