M&A Tips: Selling Your Business to Your Employees (ESOP)


Thinking about Selling Your Business?

If selling your business is top of mind, you might want to think about selling your business to your employees. Here’s a discussion that we had recently with an Entrepreneur who helped sell his business to his employees.

Selling Your Business to Your Employees transcript below:

Pamela WasleyCal, let’s talk a little about the ESOP.

Cal LaiSure

Pamela Wasley:  So you did that with your company, but you probably could’ve gone out and done a deal with a strategic buyer, a private equity firm, or gone through a private investment banker. What was the over-arching reason why you went with the ESOP?

Cal Lai:  You know, we actually did have much better offers. We could’ve sold the company for a lot more money. Probably 50% more money if we took a strategic buyer. But as we went through the diligence process, we realized that the company would be a really different company.

The company started with one guy who built a thousand-person organization, one person at a time. The company had a really strong sense of family values, we really believed in doing things the right way and working hard and rewarding staff. We had great perks and benefits, people were highly incentivized to perform and stick around. We really created a family-like environment. Also, we knew that once we were hired by a strategic buyer that would kind of go away and since many, many, many other people in the company had been there through most of that time and contributed a lot to the success of the company, we didn’t think it was fair that we put their jobs in jeopardy or change the culture.

So the ownership was willing to take a lot less because they could see the continuity of the organization that was built with a lot of pride in that. I think if you ask the ownership that sold at the time, they would all tell you that even though they could’ve made more money they felt better about the transaction because the company was able to continue with a set of values and culture that it had built.

Many of our key employees were able to continue in their roles, we had a succession plan planned out and put into effect and many of us are still around operating the business. So ultimately we just felt that it was the right decision for our employees to sell it to them, rather than to maximize our returns and leave them in the bag.

So it all comes down to what we talked about before: the seller’s intentions as an entrepreneur and as a business owner. You really have to understand what your ultimate exit and goal is, and, you know, having been through this, I can tell you from my personal experiences it’s not all about the money. I think when you work very hard to build your company and you say to yourself, “wow, I don’t want this to change. Is there no way I can exit without changing everything I built?”

In that case, you might take less, but you may have the satisfaction of knowing that what you built remains. So, I think that owners always have to be clear about what their goals are and why they’re doing what they’re doing. If your goal is to maximize your financial returns that’s probably a different strategy than, seeing continuity in an organization that you built. So you’ve got to think about what your goals are.

Pamela Wasley:  So Cal, you weren’t ready to step down either. I think that’s one of the reasons?

Cal Lai:  No, it was odd because there were basically 3 primary owners of the business. Two wanted to retire. I didn’t. If they were going to sell the company I was planning to step out anyway, and actually, I was the one who had arranged the purchase from the few strategic buyers. So I’d spent 9 months working through that process because I thought that’s what the other two, who owned the business more than I did, wanted to do. And when we came down to it, it was a matter of them deciding that they didn’t want me to leave and they didn’t want employees to leave.

There’s a significant age difference. I’m probably 25 years younger than the two other founders, so I didn’t have an incentive to go sit on the beach and retire.  I wasn’t in that mode. So I think ultimately it was a really good decision that the owners really thought about what was best in the long-term interests of the organization that they had built, not necessarily their individual pockets.

Having said that, they exited with a fine amount of money and were able to comfortably retire and not have to work again. So they did accomplish their financial goals as well.

Pamela Wasley:  Great.

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