Succession planning, exit strategy, sustainable business, retain passion, create liquidity, leave a legacy … if these words caught your attention, you may have the ‘ESOP Factor.’
What is an ESOP? An Employee Stock Ownership Plan (ESOP) is a qualified defined contribution retirement plan that invests primarily in the common stock of the sponsoring company. Employee ownership – as little as 20% or 100% – can transform a company. When employees become owners, productivity rises and errors decline. Many studies by The ESOP Association and National Center for Employee Ownership (NCEO) have found that ESOP-owned companies have outperformed their peers and the general stock market.
Establishing an ESOP can be a successful tool for many company owner(s) in their succession planning. The owner’s shares are sold to the ESOP at a fair market value whereby creating liquidity for the owner(s) and a structure to reward employees by giving them an equity ownership interest. There are also significant tax advantages for the sponsoring company and the selling shareholder.
ESOPs require planning. Owners and their advisors should review the advantages and disadvantages to determine whether an ESOP is right for them.
For owners looking to achieve the maximum cash price for their business, an ESOP is probably not the best fit. There can be significant professional expenses incurred to establish an ESOP as well. Because of the costs and complexities involved, an ESOP may not be the right fit for a small company with less than a few million in sales, carry a lot of debt, or have a high employee turnover rate – or for an owner that does not care what happens to the company after they leave.
On the other hand, if the selling owner has developed a great management team, is financially strong and wants to make sure that what they have created in their business continues after they move on, if the owner and employees believe that the business really matters and they do not lack passion in the workplace, if the desire is to leave a legacy … then they just may have the ‘ESOP Factor.’