Employee Stock Ownership Plans, a popular and tax effective way for entrepreneurs to sell their businesses, have caught on in the craft brewing industry. At least four separate brewers have recently sold to an ESOP: 23rd Street Brewery, Blind Tiger Brewery & Restaurant, Free State Brewing Company and New Belgium Brewing Company. These brewers are following the lead of other brewers including Full Sail Brewing Company, which became employee owned in 1999.
Why is this?
First, employee ownership seems to fit well culturally. Many craft brewers don’t want to sell “big.” They are often closely-held breweries that have been operated and manage by family and local community members for years. These brewers are employee-centric with a focus on benefiting and maintaining a strong relationship with the community, which makes an ESOP an ideal way to keep the business local by transferring the value of the business to the employees over time. Moreover, maintaining a local and unique brand is a significant component of marketing strategy.
Second, the owners of the brewery can retain control of the business. This is particularly attractive to closely-held breweries, because it allows owners to turn their equity in the company into cash, while retaining control and influence over the business, if desired.
Third, low interest rates are resulting in favorable leverage terms and relatively high prices being paid to sellers in ESOP transactions. Prices are often set based on the present value of future cash flows. Low interest rates translate into high present values for business owners.
Finally, ESOP-owned companies are almost always set up to legally not pay any federal income tax. This means that the company has pre-tax cash flow to pay the purchase price to the seller over a relatively short period of time.
If you are interested in learning more, please visit our website.