One interesting question we are consistently confronted with is “who will be the buyer for my company?” This question is even more relevant in light of a recent Wall Street Journal article describing the sale of a company to its employees by way of an ESOP.
“There is no question that a sale of a company to its employees is possibly an appealing option”, says Achim Neumann, President, A Neumann & Associates, a leading M&A and business brokerage firm headquartered in New Jersey. ”However, there are often more downfalls than upsides.”
One of the most significant – and immediate – factors is the risk exposure to a business owner. Initiating a discussion about a sale to employees will instantly raise a host of concerns with employees regarding their job security; with lenders regarding repayment of of credit lines; and with customers about continuity in service and product flow.
From an employee’s point of view, there is a double risk exposure, inasmuch as the employee’s stockholdings will be highly concentrated in one investment. Holding substantial amounts of stock in one’s own employer has never been a good idea (recall WorldCom or Enron), and it’s even worse when it occurs at precisely the time when the established, proven management leaves.
“There is another problem for employees,” says Steve Wrubleski, Managing Director, Southern New Jersey. “Right now, we are working with a few companies that are attempting to sell a company from an ESOP to an oustider. This requires the consent of ALL employees – a definite challenge to say the least. Establishing even a simple valuation appears to be difficult.”
An additional pitfall is the proper valuation of the firm. An inflated value will provide little incentive for a lender to lend to the ESOP trust in order for the trust to buy out the shares of the owner, using only such shares as loan collateral. In that particular scenario, a business owner / seller might have to guarantee the loan, in essence putting the seller at risk for future decisions of a new – and potentially inexperienced –management.
So what looks on the surface as an easy exit strategy for a business owner, given an economic environment that incorrectly suggests that there are no business buyers, a business owner can ultimately experience more disadvantages with an ESOP than pursuing an outright sale.
So what is a business owner to do?
Counterintuitive to common perceptions, the market has been and remains good for business sellers. “We most definitely have more buyer and investor inquiries than we have businesses available, even more than what we’ve had in the past”, reiterates Gary Herviou, Managing Director, Central New Jersey.
In essence, the true Fair Market Value and salability of a business can easily be established by way of a third party valuation, providing a business owner with a base line to make a sound decision.
“With a realistic asking price, a business owner will not have a problem obtaining a Fair Market Value for his well-run company”, says Neumann. “It’s mostly marginal operations with poor management that face the challenges of finding a proper buyer, a trend we can confirm throughout all of our seven offices across the region.”