One of the significant challenges of our time is the number of small firms that face a succession crisis. And generally speaking, small firms do not handle this well, there is too much emotion around the future of family members and staff.
At Vubiz we faced these conflicts as we tried to find an exit strategy for a dozen outside investors and an exit strategy for myself because of age. We were looking for buyers to acquire about half of our outstanding shares.
We had endless offers from investment bankers who wanted to buy a piece of our company, merge us with one or two other companies and sell the new package to a large corporation. They were basically interested in our customers and our technology, not our people.
It was Jim Rapino, our President and CEO who suggested we implement an Employee Stock Ownership Plan or ESOP as a succession strategy and have our investors sell their shares to our employees.
The concept is simple, but each plan is different, so we needed experts to take us through the process and design a plan for our needs. We worked with Perry Phillips of ESOP Builders.
What happens in simple terms is that we create a special class of ESOP shares and transfer all shares that are to be sold to employees, to ESOP shares. Then the company lends the employees the funds to buy these share and charges 1% interest on the loan. The employees pay down the loan over five years from dividends paid to the ESOP shares and from employee payroll deductions.
The great benefit is providing employees with a stake in the company, with all that means for improved productivity and morale. Employees, because of the assistance provided to buy the shares effectively, are given the shares at a discounted price. But everyone wins.
Vubiz Ltd. is a technology company with a typical small business succession challenge. And the ESOP is a succession option for firms with at least 20 employees and a solid cash flow. This means that about 10% of the SME community should be looking at an ESOP.