ESOP: Why These Four Letters Are So Popular with Business Owners and Employees

David Ference is a First Vice President of Commercial Lending at PeoplesBank. With over 15 years of experience, David is always staying attuned to strategies and tactics that can help his clients (and their businesses) thrive. Employee Stock Ownership Plans (ESOPs) could be right for many business owners, and in this article, David outlines the reasons why they should be considered.

Put yourself in the shoes of a business owner who has worked for years to build something and now is beginning to think about leaving it. After all, during those startup and growth years, concerns were focused on staffing, infrastructure, and perhaps equipment – not retirement. Yet, for an increasing number of owners nearing retirement, who also want to build stability, values alignment, and employee retention, ESOPs are becoming increasingly popular. According to the National Center for Employee Ownership, “Almost unknown until 1974, ESOPs are now widespread; as of the most recent data, 6,460 plans exist, covering 14.2 million people.”

Let’s start with the benefits to the owner. ESOPs can not only fund their retirement but also can ensure stability and preserve the company’s future as a key succession planning tool. ESOPs create a market for the owner’s stock in the business in which the plan, as opposed to an outside owner, buys that stock and redistributes it as a benefit to employees. Usually, a board and executive leadership continue to run the organization and a trustee runs the plan. That trustee provides employee owners with periodic information regarding the health of the company, but leadership still runs the company.

ESOP-engendered stability also comes from the fact that employees are now owners too. With an ESOP, employees become invested in the company and therefore have a new financial interest in keeping it healthy. Studies show that ESOPs are an effective tool for attracting new employees, as well as retaining existing ones. According to the ESOP Association, 38 percent of Americans want to work for a company that is owned by its employees.

Employee-owned companies also seem to do better during tough times. In their book How Did Employee Ownership Firms Weather the Last Two Recessions? authors Fidan Ana Kurtulus and Douglas L. Kruse found the following.

“Employee ownership is generally linked to increased worker performance and commitment, enhanced employee cooperation toward firm goals, lower turnover, higher pay, and wealth, as well as to improved firm-level outcomes such as higher productivity, greater employment stability, and firm survival. These benefits—particularly the greater stability and survival, can help the overall economy by reducing unemployment and resisting recessionary pressures.”

For an owner looking to transition out of their company while helping to preserve its future and reward loyal employees, ESOPs could be a viable option. The owner receives compensation for his or her years of service, while employees receive an easy-to-manage retirement benefit. This benefit, perhaps more significant than ever, comes at a time when an estimated 25 percent of Americans have no retirement savings, and 6 in 10 non-retirees who hold self-directed retirement savings accounts, such as a 401(k) or IRA, have little or no comfort in managing their investments according to the Federal Reserve (Report on the Economic Well-Being of U.S. Households).

“There are several factors that go into the feasibility of an ESOP as a mutually beneficial exit strategy for an owner and their employees. Speaking with your attorney and accountant is a good first step to analyze the costs, risks and benefits of an ESOP. Once determined to be feasible and the value of the company’s equity is established, your banker can help provide ESOP funding options.” Dave Ference, First Vice President Commercial Banking at PeoplesBank.

PeoplesBank works with businesses, big and small, and believes local businesses are vital to the community. For more information on how PeoplesBank can help your business, contact a Banking Officer.