When it comes to business ownership transitions, most owners think of traditional routes -- like selling the business to a strategic buyer or transitioning the company to another family member. But there's also the ESOP route -- which essentially means transitioning the company to an Employee Stock Ownership Plan (ESOP).
An ESOP offers potential benefits to employers and owners. But ESOPs also come with some risks.
True believers in the ESOP model include Phacil, a midsize IT services provider with roughly 850 employees and about $140 million in annual revenue, according to Washington Technology. Phacil recently disclosed its transition to ESOP ownership. The plan is "designed to provide employees with an ownership stake in the Company. It is a long-term plan, which rewards employees for remaining with the Company and growing it over time."
Phacil co-founders Rafael Collado and Sascha Mornell launched the company in 2011 and owned the business before transitioning to the ESOP model in 2016. Collado and Mornell have exited the company but current senior leadership remains in place, Washington Technology reports.
So why transition to an ESOP? "Various options for selling the company, including an ESOP, were considered over the past few years," Phacil's current leadership tells ChannelE2E. "The decision to pursue an ESOP occurred during the summer of 2016. What “sparked” the idea was unanimous agreement among ownership and management that executing an ESOP would be a win-win for all involved (e.g. owners, employees, and management) and the ESOP ownership structure was the best going forward for the company."
We asked Phacil for a few tips to help businesses that may be researching and/or considering the ESOP model. They offered these three guiding points:
1. Select great advisors with prior ESOP experience: "We selected The McLean Group as our investment banker, Greenberg Traurig and H&K as our legal counsels and JP Morgan as our banker. Each of them were exemplary in their support and we couldn’t have gotten this done without them. We would gladly provide positive recommendations for each as ESOP advisors."
2. Select a great ESOP Trustee: "After a detailed review of several Trustees, we selected Argent Trust. They came highly recommended and we are very happy we chose them."
3. Buy into a long-term view: "An ESOP is considered a retirement benefit plan designed to provide employee with an ownership stake in the company. By nature it is a long-term plan with a simple success formula: Employee-owners make great employees. Buying into an ESOP means buying into this long-term view and investing in the development of an employee-ownership culture. Historically, Phacil has been a very inclusive and diverse organization, with a very strong “family-oriented” culture. So buying into a long-term view is already part of the existing culture, which we believe benefits the company going forward."
We'll be sure to check in with Phacil later this year for more updates in their ESOP ownership model.
