Employee Ownership as a Succession Planning Option

Gene DalhoffApril 8, 2015

Business Successions on the Horizon:The talk is all about the Boomers

• Baby Boomers have been described as a generation of entrepreneurs (Monster.com)

– More businesses were founded by those born from 1946-1964 than any other generation (Generational Equity)

– It is estimated that nearly 4 million, or 66%, of companies with employees are owned by baby boomers (Axial Networks)

• The oldest baby boomers turn 69 in 2015– The wave of boomer retirements, and their business

successions (or lack thereof), have just begun

Most Small Business Owners are not Planning for a Future Without Them In It

• Do you, as a small-business owner, have a succession plan in place? (CNBC) Yes: 31% No: 69%

• Seven in 10 business owners age 50 or more lack a succession plan. (U.S. Trust, Bank of America)

• Over 60% (of small business owners) said they do not have a viable succession plan. (Harbour Financial)

• The realities are that most business owners do not “formally” plan for ownership transfers; in fact, it’s estimated that 85% of business owners have no exit strategy. (MFRTech)

Reasons Why More Small Business Owners Aren’t Planning Succession

• Too busy managing the business, worrying about today rather than planning for tomorrow

• Founder’s Syndrome: Inability to let go what they have built

• Fear of Change: What will they do without work?

• Lack of suitable legal and business advice regarding transfer options, taxes and etc.

• Difficulties identifying a qualified successor (family member, employee, outside purchaser, etc.)

Succession Concerns are Economic Development Concerns

• An estimated $6 trillion of personal wealth will be transferred over the next 10 years consisting primarily of privatively held or family owned businesses

(MFRTECH: America’s Business to Business Journal for Industry)

• $10 trillion of businesses are expected change hands in the following 20 years (Indiana Business Journal)___________________________________________________________________________

• These businesses, the jobs they provide and the tax base they generate, exist in communities of all sizes across the U.S.

• If succession plans are not put into place to retain businesses in they communities in which they are located, jobs and tax base will be lost.

The Role of BRE In Economic Development and Identifying Succession Concerns

• Business Retention & Expansion (BRE) should be the backbone of most Economic Development Organization programs, especially in smaller, rural communities

• Studies indicate 60-95% of net, new jobs and capital investment stem from existing businesses and that companies tend to expand in communities where their needs are understood and met

• Onsite, BRE survey visits are a great way to help identify potential succession concerns, and to potentially head off the loss of a local business and jobs

Broaching the Subject of Succession: Starting with a look at valuation

• Valuation – What is the business worth?

– Purpose of valuation• Strategic Value, Fair Market Value, Defensive Value

– Valuation methods• Asset Approach, Market Approach, Income Approach

– Who can help determine valuation?• Accounting Firms, Attorneys, Financial Planners,

Business Consultants, SBDC, some larger EDOs

Small Business Succession Options

• Keeping it in the family– Direct sale, Gifting, Trusts

• Management Buyout – Direct sale, may also be combined with ESOP

• Sale to Employees– Most often in the form of an ESOP or Worker Coop

• Sale to Outside Interest– Direct sale, but could also become a Member Coop

• Liquidation– With resulting loss of jobs and tax base

Primary Resource If Employee Ownership is Identified as an Option for Succession…..

Questions & Discussion

Thank you

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