Business owners who are thinking about transitioning out of their businesses have to consider both...
A New Era for a Family Business with an Employee Stock Ownership Plan (ESOP)
The owners of Sullivan Tire, a tire and auto repair chain with over 100 locations across five New England states, recently announced that they will turn their company over to their employees via an Employee Stock Ownership Plan (ESOP), shedding light on an alternative path to business succession. The aging Sullivan brothers, who have steered the company since its humble beginnings in 1955, rejected lucrative buyout offers in favor of the ESOP. This move will effectively hand over the reins of the company to its approximately 1,500 employees.
Preserving a Legacy
The Sullivan brothers’ decision to adopt an ESOP reflects their commitment to preserving the company’s unique culture and the “employees are family” ethos initiated by their patriarch, Bob Sullivan. The Sullivan Tire brand, which has thrived for nearly seven decades, is built on a strong sense of community and a shared vision among employees. Paul Sullivan, one of the owners, affirmed that “there is no trickery to this” and emphasized the importance of maintaining the company’s culture.
An Alternative Exit Strategy
The Sullivan brothers could have chosen a more traditional path to retirement by selling their company to a corporation and becoming wealthy beyond imagination. However, they recognized the value of their employees’ contributions and decided against this route. “We have enough money, we’re fine,” said Paul Sullivan. Instead, they have set in motion a stock deal for all employees, effectively sharing the company’s future success with the workforce.
Empowering the Workforce
Under the ESOP, Sullivan Tire employees will become part-owners of the company. They will fully vest in their shares after six years and have the flexibility to either rollover or cash out their stock, depending on their departure or retirement. This innovative approach demonstrates the company’s commitment to its employees. The decision is not merely a generous act but also a strategic move to motivate employees to work harder, stay longer, and potentially attract new talent in a competitive job market.
The Sullivan brothers see this move as an opportunity for long-term team building rather than a swan song gesture. The current management team remains in place, ensuring stability. However, over the next few decades, employees will earn stock based on their years of service and performance reviews, further cementing their commitment to the company’s success.
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As the company’s employees become shareholders, they are not only financially invested but also emotionally connected to the brand’s success. Sullivan Tire’s move sets an example for other businesses to consider employee stock ownership plans as a way to secure the future of their companies while promoting a sense of community and shared responsibility among their workforce.
As of 2023, the National Center for Employee Ownership (NCEO) estimates there are roughly 6,500 ESOPs in the United States covering almost 14 million participants.
With the proper planning, an ESOP can be an attractive business transition option for owners. It enables the current owners to retain control while providing ownership for the employees, liquidity to fund their retirement, and most of all, significant tax savings. However, developing an ESOP takes significant time, expertise, and money.
As with any business exit strategy, you have to understand your situation and your goals, both financial and non-financial, before considering an ESOP. Once you decide to move forward, you want to make sure that you are working with advisors who have deep experience in ESOP creation and administration, valuation, and compliance to ensure success. If you’re thinking an ESOP might be the right option for you, contact us to discuss your situation.
