How your star employees can afford to buy into your business
You’ve heard the sentiment, “good things take time”, but for some of us, time is a luxury we cannot afford. Employee Share Ownership Plans typically take 5, 7 or even 10 years to achieve a substantial and successful transference of business ownership, and this can be even more pressing if the process has not begun early enough – hence our advice to always ‘begin with the end in mind’. If you are in the predicament we’ve highlighted, all hope is not lost and this is where Leveraged ESOPs come into play.
Leveraged ESOP is a type of employee share plan that accelerates the process of succession by using debt to speed up the purchase of equity for your key employees whom you deem to be the best hands to leave your business in. Put simply, this particular ESOP makes it possible to borrow money upfront to make a more significant initial purchase of equity. The overall structure of the Employee Share Ownership Plan doesn’t need to stray too far from the original; however, the funding is now bank debt, owed by the ESOP, rather than profit share or employee share equity.
So what does this mean for the future of the business?
The bank lends a certain amount of money upfront meaning the ESOP is rapidly advanced and the balance is funded through both dividends after loan repayments. Further contributions of profit share made by your key employees will contribute to an accelerated equity investment. All of this ultimately means you sell your business quickly and the positive implications of an ESOP, such as performance improvement, are still possible to achieve despite the plan being put into action late in the game.
Although we encourage the implementation of succession and exit strategies early, there’s really no losers with a Leveraged ESOP. Learn more about ESOPs or get in touch today to discuss the succession or exit plan that’s right for you.