Some 70% of owners of small and midsized U.S. businesses will retire in the next 20 years, selling or passing on $10 trillion in assets (California Association of Business Brokers). Yet 58% of 200 such firms surveyed last year by Wilmington Trust don’t have an ownership transition plan for the business. That’s a recipe for trouble for owners who don’t want to sell their business to another company and yet want it to keep going after they exit to fund their retirement.
These owners may have the option to sell it to employees through an Employee Stock Ownership Plan, known as ESOP. It can be a viable choice: Owners can fund their retirement, keep their firm independent and watch employees carry on their legacy. However, moving to an ESOP isn’t risk-free. The new owners must be strong leaders, and the business must generate enough cash to fund itself and buy out the old owners.
If owners of midsized businesses fumble, it could become a widespread problem in the U.S., given that tens of thousands of Baby Boomers looking to exit and that midsized businesses account for 34% of U.S. GDP and 33% of employment, according to Ohio State University’s National Center for the Middle Market. Moving to an ESOP requires exceptionally strong planning. The story of HdL Companies, a Southern California-based professional services firm, is a case example of how to do it right.
How HdL’s Owners Solved Their Transition Problem
To successfully transfer ownership, a strategic approach is required: identifying the next generation of leaders and owners, getting their buy-in to invest their lives into the business and finding a way to fund the buyout. And founders must truly hand the reins of leadership over.
Consider HdL Companies, which was founded in 1983 by Robert Hinderliter, with co-owner Lloyd de Llamas joining in 1987. Today, the Brea, Calif.-based company is a successful growing business with 80 employees in five offices focused on maximizing local government revenues by providing a variety of compliance audits, analytical services and software products in California and Texas.
In 2005, both Hinderliter and de Llamas turned 65. They wisely started looking for an exit for themselves and their families that would leave the business independent, able to serve customers well and allow the employees to continue flourishing. In 2007 they formed an Employee Stock Ownership Plan (ESOP) and sold 33% of the business to the company’s employees.
Both owners knew that handing over some shares would not be enough. A successful transition involves a culture of ownership with its new leaders, where ownership is emotionally important to them, and full delegation of all the tasks and responsibilities that owning a business entails is understood.
Truly Transferring Ownership Makes It Real
Many owners talk about sharing legal ownership but never pull the trigger. They make earnest yet empty promises that create resentment rather than high performance. Getting some ownership—even two to five percent—into the hands of the next generation of leaders makes it real for them. All parties to the plan need a timeline and structure that shows how ownership levels can be increased.