Recently, a Wall Street Journal article noted that many family-owned companies have begun exploring sales to private equity groups. According to the authors, “just as corporate mergers and acquisitions are booming, the market for family-owned businesses has been sizzling.” But there’s another important option for owners looking to sell: employee stock ownership.
Employee stock ownership plans (ESOPs), specifically S corporation ESOPs, are a better way for these families to secure their future than an outside sale, because they leave their companies intact, preserve the owners’ leadership, and provide stability to employees.
Compared to an outside buyer, employees embody the trust and organizational knowledge that helps family-owned companies thrive. Transitioning to an S ESOP grants workers more “skin in the game” for long-term success, combining loyalty and experience with a commitment to carry forward family owners’ goals. It even allows many owners to cash out of their closely held stock while maintaining influential company roles, preserving the connection between worker and family member interests.
Just take a look at the history of ESCA member McCarthy Holdings: when the last member of the McCarthy family cashed out in 2002, the company’s ESOP had already existed for six years. Despite the sale of the family’s stake, CEO Michael Bolen claims “the same principles that helped get the business off the ground in 1864 still guide us today.” Most business owners would be hard-pressed to carry on such a strong legacy in any other type of succession plan.
When a company is sold to outside hands, there are no guarantees. The company can be broken up, downsized, or moved – creating instability for employees and possibly going against the wishes of the family owners. By aligning the incentives of workers and owners, S ESOPs have proven to be more stable, more productive, and better employers, both in terms of pay and retirement savings.
For families concerned about the future of their businesses, S ESOPs are a great way forward. Not only do they preserve the business and help carry on the owners’ plans, but they also ensure that the hard work of families and their employees leaves a lasting impression on a company’s growth and success.