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Strong Successor Management Key to ESOP Success?

The Minneapolis StarTribune recently published an interview with Paul Halverson of Chartwell Financial Associates. Mr. Halverson founded Chartwell in 1995 with the vision of providing business valuation and ownership-transition consulting services to privately held companies. According to Mr. Halverson, about 50% of the engagements of Chartwell are connected to ESOPs.

When asked what makes for a successful ESOP company, Mr. Halverson pointed to a strong management team that can perpetuate the company following the exit of the entrepreneur/founder. We agree. This answer points to the “people” side of the succession planning dichotomy. That is, any succession plan essentially has two questions to answer: 1) How are the current owners going to monetize/liquidate their equity in the company?; and 2) Who is going to lead the company going forward?

If a company is acquired by a competitor (i.e., a “strategic sale”), for example, then both of those questions might be easily answered by the purchasing company. That is, 1) the competitor pays to the selling shareholder(s) the value of the company, normally financed with both cash and seller paper (e.g., a promissory note); and 2) the competitor will step in and run the company going forward. So, both sides of the succession plan are satisfied.

However, strategic buyers often are able to pay a higher price only because: 1) they do not plan to keep many/any of the executives of the existing company; and 2) they are able to lay off a significant number of employees because of redundancy (such as HR staff, IT, marketing, etc.). Accordingly, some selling shareholders do not prefer to sell to strategic buyers.

Selling to an ESOP solves the first part of a succession plan (the financial part) but not necessarily the second. So, to Mr. Halverson’s point, the seller must resolve the “people” part of the equation. It may be that the seller herself intends to stay on and lead the company following the sale to the ESOP. Or, it may be that there is a management and leadership team ready to take over as soon as the seller decides to leave. But if there is no succession plan for the “people” side of the equation, the “financial” side of the equation will negatively affected.

About the Authors

Andrew Bezouska is an attorney practicing out of our Madison office. He is a member of the Employee Benefits, Labor & Employment and Tax & Tax Advocacy practice groups. Contact Andrew by email or by phone at (608) 252-9200.

Timothy Stewart is an attorney practicing out of our Metro Milwaukee office. He is a member of the Employee Benefits, ESOP and Labor & Employment Relations practice groups. Contact Tim by email or by phone at (262) 754-2869.


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