Do I Give the Business to My Children or Sell Out?

Take It to Your Team
family-2Employee Stock Ownership Plans (ESOPs) offer one solution to difficult succession issues. That’s the tool that Achyut “Doc” Setlur used. Setlur, who immigrated from India more than half a century ago, spent two decades working for Fluor, a big engineering company in the nuclear power plant business.

In 1990, he decided to go out on his own by creating a one-man consulting firm called Automated Engineering Services. The business grew rapidly. At age 68, Setlur started thinking about how to make an exit. He and his wife, also an engineer, had one son, who was studying to get a Ph.D. in material sciences, an unrelated field.

“My business was very different; he was just not into it,” Setlur recalls. “I was quite respectful of his decision to continue his research because that was what excited him. I wanted to keep the company in the family and continue the legacy, but that was not to be.”

“I was quite respectful of [my son’s] decision to continue his research because that was what excited him. I wanted to keep the company in the family and continue the legacy, but that was not to be.

That’s a powerful word—“legacy”—that many CEOs talk about in facing the decision regarding how and when to step aside. Setlur did not want to sell out to a larger company that might fire or demote trusted long-term employees. Instead, in 2006, he consulted with his financial advisor at Merrill Lynch, Sharon Oberlander and other experts and opted to create an ESOP.

There are many different variations of ESOPs, but this type did not require that employees invest any of their own money or borrow from a bank. It was internally funded. “Maybe Doc left something on the table,” Oberlander says. “But he left money for others.”

As a result, each employee now had skin in the game and the company grew even more rapidly. By 2013, it had 220 employees and five district offices around the U.S. Setlur left in 2014, but the story doesn’t end there. A British nuclear engineering firm looking to expand into the U.S. agreed to buy Automated Engineering later that year. Setlur and his former employees were able to sell their shares at high valuations with all the top employees remaining in place. Now 78, Setlur lives in Naperville, Illinois, and his son remains happy in his research role.

An Early Start
One takeaway from Setlur’s experience is that CEOs need to have candid conversations with their families early and often. “You can’t assume your children will want to go into the business if they are not already,” says Oberlander. “Or, if they want to do so, that creates other issues that should be on the table. Who is in the business and who isn’t in the business? That affects everybody.”

She argues that families need to include non-family members in their discussions at some point because those outsiders bring a certain measure of objectivity. “If you go into these family meetings, you can quickly see that the kids are very different people,” she says. “One daughter is a risk-taker. Another daughter is extremely conservative. The son is totally disinterested. That’s not a recipe for three people to work together.”