As Employee Stock Ownership Plans (ESOP’s) approach their 50 year anniversary, it appears that the private equity industry is finally embracing the concept that broad-based employee ownership is not only good for society, but good for business. While the genesis of this strategy shift appears to be in response to increased scrutiny of PE funds’ policies towards environmental, social, and governance (ESG) initiatives, it turns out that aligning the interests of workers and owners results in improvements to the bottom line.
This fact was recently formally recognized by the private equity industry as evidenced by the formation of an initiative called Ownership Works. The mission of this initiative, spearheaded by KKR partner Pete Stavros, is to encourage companies to have their employees – especially low-income employees – become shareholders.
With an increasing focus on private equity to enhance returns by improving company performance rather than relying heavily on financial engineering, employee ownership is becoming a larger part of this strategy. Another factor that may be causing the shift is the desire of sellers to ensure that their larger workforce has opportunities for wealth creation post transaction.
What the ESOP community has known for decades (i.e. that employees are a critical component to the success of a business), is now apparently becoming a meaningful part of the strategy of private equity funds to enhance the operating performance of their portfolio companies. While the structure is different in a private equity-owned company, the concept is the same. If employees have a stake in the company’s performance, turnover will go down, productivity will increase, and overall company performance will benefit. At the same time, the employees will benefit from this improved performance as will the PE fund and its investors.
For business owners who are looking for an alternative to a private equity transaction, an ESOP can make perfect sense. In an ESOP structure, corporate culture is maintained, significant tax benefits can accrue to the sellers and the company, and employees can obtain a meaningful benefit through their beneficial ownership in the ESOP. Structured properly, the transaction can also provide for a market rate of return on the seller financing while keeping the debt service of the company at manageable levels. A properly structured ESOP implementation can also result in benefits to key employees over and above their participation in the ESOP.
If you are a business owner thinking about an exit or an advisor to middle market business owners, please contact us to discuss the pros and cons of selling to a private equity fund or selling to an ESOP. A thoughtful, unbiased assessment of the various alternatives to ownership transition is critical to ensure the best possible outcome. Acuity Advisors has been helping closely held companies and their owners get to the right result for over 30 years. Contact Chris Kramer or Chase Hoover to learn more or visit our website at www.acuityadvisors.com.