Business For The Long Haul

"I really think your success in your professional life is not measured by what you do with your business, but how you get out," says Scott Rossiter, president of Lampin Corp. in Uxbridge, Mass. and long-time client of Leading Edge member Carlin, Charron & Rosen LLP.

"People will remember for a long time if you liquidated, sold to a huge corporation or if you allowed the company to grow," he adds. The president of this manufacturer of high-quality precision-machined components purchased the company in 1982 after it had changed hands three times since its founding in the mid-1960s.

Some business owners explore exit strategies as they age or as their health or something in their life drastically changes. Rossiter began working on an exit strategy more than two years ago "when I saw that I'd taken the company as far as I could." Regardless of your reasons, experts agree that you cannot plan soon enough. "It's very unfortunate when I meet someone in their late 60s or early 70s and they decide then that they want to address the issue," says Mark Stepka, a director in the Akron, Ohio, office of SS&G Financial Services. "It takes a lot of thought, whether you want to turn the company over to your family, a management team or if you want to sell it outright."

The sooner you start planning, the more likely you'll be able to increase the value of the company.

Typically exit strategies are viewed as the owner being able to walk away from the business, to retire and no longer be involved, while enjoying his or her retirement home in Florida. Perhaps the children may take over and the owner will still have some contact on a peripheral basis.

More often than not, it's in the sale of the business where you can cash out. Many business owners look forward to that event, but poor planning can limit your options.

"Every business owner should think about exit strategies throughout the cycle of their business, asking themselves 'What is the value of my business? What can I do to demonstrate the value of my business?'" says Stepka.

Sharing responsibility and profits

Lampin Corp. has been heavily involved in profit sharing with its 20-some employees for years. An Employee Stock Option Plan (ESOP), a kind of employee benefit plan that is governed by ERISA (Employee Retirement Income Security Act), was a natural progression in that profit-sharing program.

Before the ESOP, Rossiter owned 80 percent and his wife owned 20 percent of the company. On November 1, 2001 he sold 31 percent of his shares to employees based on the recommendation of one of his estate planning attorneys.

"I now own 49 percent, my employees own 31 percent and my wife owns 20 percent," says Rossiter. In order to benefit from tax savings on capital gains, Rossiter was required to sell at least 30 percent of his shares. "That way, if I've invested correctly, I will never have to pay capital gains on the sale."

So how does the ESOP work? "The ESOP trust has to borrow money to buy shares of the stock. It's just a paper trust, but we used the assets of the corporation to secure a loan. In our case we were very fortunate because we didn't have to go to the bank for the funds. I'm loaning the money to the ESOP. The loan will be paid off in as little as four years or as long as seven years. At that time I'll make a decision about whether or not to sell more of my shares," he says.

Rossiter went into the ESOP thinking it would work well and that he would eventually sell the balance of the corporation to the ESOP. "I would rather see this be successful in the short run. I continue to be active and involved in the company, but my goal now is to build a middle management team. After that happens and I plan to sell the remainder of the corporation to the ESOP and then I want out," he says.

Although he is very open with his employees, Rossiter decided not to discuss his plans for the ESOP until he was ready to announce it at his company's regular quarterly meeting. "I didn't want to undersell or over-deliver the plan. We had profit sharing for many years, so many employees had already shared financially in the success of the company."

Plus, there's a little more risk involved when you allow employees to have a stake. "More risk means an opportunity for more reward. More money will be able to flow into their pockets under the ESOP than the profit-sharing plan," he says. However, if a company encounters hard times, the ESOP bears the burden.

Such an intricate plan for transfer of ownership couldn't take place without sound business and legal advice, according to Rossiter. "I had the help of corporate accountants, lawyers who specialize in ESOPs and a business valuation expert who was well versed in manufacturing."

Although much of the planning involved Rossiter and his team of business advisors, it did not mean a change in the day-to-day operations of Lampin Corp. "This was not a huge corporate change for us because we had already been sharing in profits with employees," he says.

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