A Business Exit Using An ESOP Benefits The Owner And Employees

When most entrepreneurs are asked about their exit strategy, they answer, “I’ll exit in three to five years.” They rarely do the research to determine if they’ll sell to a strategic, private buyer or employees, or keep the business in the family. Or, perhaps, they will raise venture capital or private equity to grow the company further and then sell.

Michelle Hayward did the research. She had developed a highly capable leadership team. When she exited, she wanted them to benefit, too. For her, there was only one solution. An employee stock ownership program (ESOP) was the fastest path to exiting Bluedog and driving future value for her employees. Employee ownership takes the company’s award-winning culture and the accountability for maintaining it to the next level. It rewards employees by making them owners.

ESOPs fly under most entrepreneurs’ radars, so Hayward wants to share her six reasons for doing one. Both owners and employees win with this approach.

Hayward struck out on her own in 1999 and started Bluedog. Most marketing consultancies were focused on renovating brands to stay one foot ahead of the competition. Bluedog focused on innovation based on consumer needs and desires.

Leadership at Nestle Purina took notice and asked Bluedog to provide more strategic guidance. Bluedog started guiding new products, adjacencies, and even acquisitions. It expanded into helping corporations and brands define their purpose.

As Bluedog evolved, so did Hayward as a leader. She oversaw all the stages of the company, from founding to growing it into an enterprise. Hiring the right people and creating a supportive work environment was vital to doing high-caliber work for clients. In 2021, the company was rated by Crain’s as the #1 place to work in Chicago.

As a Women Presidents Organization (WPO) and Vistage member, Hayward was periodically challenged to think about how she might exit Bluedog. WPO and Vistage share insights in groups through facilitated discussions. Guest speakers address topics relevant to entrepreneurship. She took up the gauntlet to research how she would exit her business.

“I’m not going to be static,” said Hayward. “I will understand my options and what is best for me, my management team, and my employees.”

She started to read books and articles and talked to peers, brokers, strategic buyers, and experts on the topic. An acquisition would create wealth for a handful of leaders at the acquirer but not for her team.

“I’ve met so many women entrepreneurs who have not moved forward into an exit as they haven’t found a way to exit with their values and business objectives intact,” said Hayward. “I looked at a lot of different paths/solutions.”

ESOPs pre-date the 1974 Employee Retirement Income Security Act (ERISA), but it was the first law to recognize ESOPs. Some of the nation’s largest companies are at least 50% owned by ESOPs, including Publix Super Markets. As of 2023, there are about 6,500 ESOPs, covering almost 14 million participants.

Hayward’s concluded that an ESOP was the fastest way to exit the company and create wealth for herself and her team. It was a win-win for the people she cared about. “ESOPs are tax efficient for the buyers and the sellers of the business,” she said. “It’s also flexible, and you control the percentage you sell, the terms of the deal, and the timing.”

“My personal drive was to bring as much value forward to our loyal, mostly female, Bluedog employee population,” said Hayward. “We have always had a great culture and worked intentionally over two decades to build it. Employee ownership takes our culture and the accountability for it to the next level and rewards employees by making them owners.”

ESOPs are a great way to provide for the long-term sustainability of the business or your legacy.

“ESOP is tax efficient for owners looking to sell and for the business looking to grow!” exclaimed Hayward. Her six reasons for doing an ESOP:

1. With an ESOP, you remain in control of the percentage sold, the terms of the deal, and the timing. You can customize the value you share with your key employees. If you want, you can choose to stay in control.

2. Multiple tax advantages enable you to customize a couple of different streams of cash for you and the other people important to you.

3. Capital gains taxes on the sale can be deferred through a 1042 exchange.

4. ESOPs are tax efficient for company owners and your beneficiaries. You can avoid capital gains through estate planning using Qualified Replacement Property (QRP) so that your estate-plan beneficiaries don’t pay capital gains.

5. The business becomes much more tax efficient, setting itself up to pay back the loans employees took to buy the company and to enable future acquisition opportunities.

6. Employees receive value with the taxes on that future value being deferred.

How will you exit your company?