Exit strategies and liquidity models - Faster, cheaper, better to the end, even when we are cashing out, going for the gold. A Small Business School Home Page for an episode with Joseph Johnson, Ray DiSanto, Ebby Halliday, Matt and Russ Seeley, Jim Schell, Peter Schenck, Lorraine Miller, Tracy Myers, Bob Orenstein, Larry Starks, Ray Smilor, Freddie Thode, Rick Valencia, Ned Lester, David Porter and Steve Watkins as seen on Small Business School, the series on PBS member stations.

Exit Strategies - Nothing is Forever

updated: January 2007

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Sell to your Employees

Use an ESOP specialists like Dr. Ray Smilor.

#6 Employee Stock Ownership
Transcript Segment - Exit Strategies & Liquidity

HATTIE: #6, sell to your employees. These last three roads are the least understood and the reason we are doing this episode.

HATTIE: So tell me about where we are.

RAY: This is a little bit of paradise -- La Jolla Cove.

Hattie: It’s a gorgeous day.

HATTIE: (Voiceover) Dr. Ray Smilor is President of the Beyster Institute and he’s an expert on ESOPs.

RAY: An employee's stock ownership program is a way to get employees engaged and involved in the company so they think and act like owners. But also a way for the owner to sell the company in a very effective way so he or she gets liquid as effectively as possible. So it helps the founder, the original owner of the company, and if it's done right, it helps the employees succeed as well.

FREDDIE THODE: ESOPs are a fabulous vehicle.

BOB: But remember, this is functional also.

RICK VALENCIA: We do have a stock option plan and we do reward people very generously with stock options right off the bat.

FREDDIE: Your employees are what carry you on.

NED LESTER: The ownership is what will entice people to come.

FREDDIE: Founders get things rolling, but employees are the people that really are the implementers.

NED: To be able to offer a part of the company and part of the ownership of the company is a very significant to attract good quality personnel.

RAY: What are the reasons that motivate an entrepreneur, a founder to want to set up an ESOP so his employees can buy the company from him or her? And the reasons may be three or four key ones, Hattie.

One is because you think it's the right thing to do because people who build the company should own it and you want them to have some ownership stake in it. That's one reason.

Second, it may be to prevent the company from disappearing. Because if the owner wants to sell the company on the open market, and a large company comes in to buy it, the company in effect may "disappear." Gets a different name. It gets subsumed into the larger firm. Or the company may actually be shut down where a competitor buys it and closes it. So you may want to prevent the company from disappearing.

A third reason may be the owner sees this as an effective way to get liquid, to get money out of the company that he or she has built. And to get liquid, there are some terrific tax advantages that benefit the owner. So you can get liquid, you can prevent it from disappearing and you can help give the company to the people who helped build it.

more...

Understanding wealth and capital formation

Key Ideas of this episode

Introduction: Think Now About Later

1.		Walk Away - Often it means "liquidate"
2.		Give It Away - You have enough!
3.		Sell To Someone Close To You
4.		Sell To Someone Like You
5.		Sell To a Publicly-traded company
6.		Sell To Your Employees
7.		Sell Through A Direct Public Offering
8.		Sell to Private Equity Capital

Case Study Guide

On the Air

We mean use an Employee Stock Ownership Plan as the instrument to sell your company to employees. You already read about Jim Schell selling one of his companies outright to two employees; this idea is wholly different.

Topic for Discussion: What is an ESOP and why should you consider executing an ESOP?

Answer: According to the ESOP Association, "an Employee Stock Ownership Plan (ESOP) is an employee benefit plan which makes the employees of a company owners of stock in that company. Several features make ESOPs unique as compared to other employee benefit plans.

First, only an ESOP is required by law to invest primarily in the securities of the sponsoring employer. Second, an ESOP is unique among qualified employee benefit plans in its ability to borrow money. As a result, 'leveraged ESOPs' may be used as a technique of corporate finance."

Ray gives us three reasons for doing an ESOP or any kind of employee stock ownership plan. He says it is often simply the right thing to do as it can keep the business from disappearing or being closed down when the founder dies or loses interest, and it provides liquidity for the founder.

You don't want to try to execute this option alone. Seek out free advice from Ray at the Beyster Institute and spend some time on the web sites of the two national trade associations for ESOPs (see the Overview section for links).

You think about it: Do you think that this option could be an employee motivation tool? Does this option intrigue you? Should you learn more?

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