Gift giving this time of year can be a challenge, especially when buying for someone you care about. While everyone approaches the process a bit differently, they are all trying to figure out how to give the most joy while also maintaining a certain level of affordability. Picking the right gift is the balance between positive intentions and practical implications. The decision for employee ownership can be a lot like this: business owners are trying to weigh the intangible value of caring for their employees and community while making the most practical financial decision for their business and family. This balancing issue comes up the most often when considering potential sale prices for a business.
When a business owner decides to retire or leave a business, they have a number of options on how to make this transition. Historically, many business owners have waved off employee ownership as an option because they have assumed that it doesn’t measure up on the practical side of the scale. Unfortunately, this is a common misconception; business owners actually get fair market value for their business in an employee ownership transaction. The valuation process when transitioning to an ESOP, for example, looks at a plethora of data points to determine what price the business would get in a fair and open market and there is federal regulation that guarantees this. Although a business’s multiplier in this process wouldn’t include the synergized value of a strategic acquisition, those strategic acquisitions are still considered as comparable sales in the industry when determining the value of the business at hand. Additionally, research shows that a strategic acquisition is just not in the cards for most businesses. And, when factoring in the long-term tax implications of employee ownership, the scale is tipped even a little further towards employee ownership for any profitable and growing business.
If the practical side of the gift giving scale is leaning towards employee ownership, then the process for determining if it’s the right fit is pretty straightforward. The positive impacts for the employees and the community are already well documented: employee ownership closes the wealth gap, addresses racial inequities, keeps jobs in communities, and helps make local and statewide economies stable. This year, consider giving your employees the gift of business ownership.