The ESOP Path for Women-Owned Businesses

Consider this: nearly 40% of U.S. businesses (over 14 million) are women-owned, generating more than $2.5 trillion in annual revenue and creating over 12 million jobs. Women-owned businesses clearly pack a powerful punch.

Certification programs not only validate ownership, control, and management but also provide numerous resources supporting growth and expansion. These include advocacy, executive education, corporate networking opportunities, pitch opportunities, and introductions to capital providers.

Like all other shareholders, owners of women-owned businesses will eventually need to plan for ownership transition. When that time comes, what happens to their women-owned business certifications? Here are 6 things to consider for women-owned businesses thinking about an ESOP transaction.

Can a woman-owned business sell to an ESOP and still maintain its certification? Yes, it's possible to maintain the certification, but only if the company meets the certifying organization's post-transaction requirements. These often include:

• Women represent 51% or more of the total ESOP plan participants.
• The account balances of women in the plan represent 51% or more of total account balances (meaning women are getting 51% or more of the economic value of the ESOP plan).
• The trustee of the plan is a woman.

How can a woman-owned business access and report this information to the certifying agency accurately and timely to maintain the certification?

The company's plan administrator (also known as the third-party administrator) can easily help organize and report data regarding plan participants and their account balances annually. After all, the plan administrator already runs various plan tests annually using the company's census data. Breaking out specific data on the women in the plan is a simple request.

Start by checking with the organization that provides your certification.

Of course, it's always best to plan for all scenarios, so what happens if the certification cannot be maintained?

The ESOP transaction can still occur even without the certification. The ESOP as a buyer will purchase the shares regardless. The key question is: how will this affect the value of the business?

Examine your customer list and ask yourself: Is the certification required or recommended? Is it a "must-have" or a "nice-to-have"?

If it's recommended but not required, are there relationship factors that would make it difficult for clients to move their business (e.g., length of the relationship, competitive pricing, unique product or service expertise, disruption to the client's business)?

• Estimate the portion of business (revenues, gross profit, earnings) that could potentially decline if the certification is lost, and also estimate the likelihood that the company would actually lose that business. For example, if customers representing 40% of total revenue value the certification, but there's only a 25% chance they'd actually leave due to potential business disruption, the valuation would likely reflect only a 10% reduction in revenues as a result of losing the certification.

If the certification is an absolute requirement for certain clients, the business related to those clients would not be reflected in valuation. However, in order to enhance the valuation in the absence of the certification, consider these factors:

• How much capacity would the business now have to take on new clients?
• What new client opportunities are in the pipeline and how likely is the business to win them?
• Are any of these new opportunities higher margin?? What additional value do these opportunities bring to the table?

Owners of women-owned businesses should consider ESOPs as a potential solution for ownership transition, just like any other business owner. While it may require more upfront planning, there are well-trod paths to facilitate a women-owned business certification and produce the desired outcome for both shareholders and employees.

About the Author:

Susan Walton is a Senior Managing Director at Lazear where she puts pen to paper in order to help clients achieve their goals. Whether analyzing and communicating the arguments for value in a sale, securing long-term financing, or handling a combination of both, Susan works closely with clients throughout each stage of a transaction to ensure that that the client’s objectives are being prioritized by all parties.

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