The Transformative Impact of ESOPs: Creating Value for Business Owners and Employees
When a business owner begins thinking about an exit, the decision is rarely just about price. It also involves what happens to employees, the company’s culture, its customers and the business after the owner steps away. An employee stock ownership plan (ESOP) offers one approach to business succession, providing liquidity to owners, supporting the company’s continued independence and allowing employees to participate in the value they help create.
Whether an ESOP is appropriate depends on the owner’s goals, the company’s financial capacity and leadership, and its ability to perform successfully after the transaction. The key question is not if ESOPs are attractive in the abstract, it’s whether an ESOP makes sense for this owner, this company and this transition.
Business Owners: Creating Liquidity While Protecting What Matters
For many business owners, the company they’ve built represents far more than a financial investment. It may reflect decades of hard work, trusted relationships with employees and customers, a family legacy and a meaningful connection to the community. That can make the exit decision more complicated than simply finding a buyer and agreeing on a price. Owners also have to decide what they want to preserve and what they’re prepared to change.
An ESOP can provide a market for some or all of an owner’s shares while allowing the company to continue operating independently. Depending on the owner’s objectives and how the transaction is structured, an ESOP can:
- Create liquidity for some or all of an owner’s shares and create a path toward succession.
- Preserve the company’s culture, identity and legacy.
- Allow the business to remain independently owned and operated.
- Create a framework where employees participate in the company’s future success.
A successful transition also depends on factors such as the company’s financial performance, leadership, governance, transaction structure and ability to meet its obligations after the transaction. Understanding what the owner wants to accomplish is, therefore, an important first step in determining whether an ESOP is the right fit.
Journey to an ESOP & Beyond Podcast
Employees: Sharing in the Value They Help Create
Employees are often at the heart of a privately held company’s success. They build customer relationships, solve problems, develop institutional knowledge and help turn an owner’s original investment into an enduring business.
An ESOP allows eligible employees to become beneficial owners through a retirement plan, generally without requiring them to purchase the shares themselves. As the company succeeds over time, employees can share in the value created through their ESOP accounts.
The National Center for Employee Ownership (NCEO) has associated employee ownership with stronger employee retention and retirement outcomes. Research involving S corporation ESOP companies has found, among other things:
- Voluntary quit rates were about one-third of the national average.
- Median ESOP account balances were approximately $80,500.
- Employer retirement contributions were, on average, 2.6 times higher than those of comparable non-ESOP companies.
- After controlling for company size, industry and region, S corporation ESOP participants had estimated retirement balances approximately $67,000 higher than comparable employees at non-ESOP companies.
- ESOP participants had more than twice the average total retirement savings of U.S. workers overall, with particularly meaningful differences among lower-wage employees.
These findings illustrate the potential of employee ownership, but they don’t guarantee a particular retirement benefit or employee experience. The value ultimately available to employees depends in significant part on the company’s performance over time.
Evaluating Whether an ESOP Fits
An ESOP can address multiple objectives, but determining whether it is appropriate requires a closer look at the transaction and the company’s readiness. The analysis may consider the economics of the transaction, financing capacity, leadership, governance, employee implications, future cash flow, and the owner’s broader succession goals. The right path will vary by company and owner. Sometimes the analysis leads to an ESOP. Sometimes it leads somewhere else.
Considering an ESOP is a significant decision. Look to our ESOP advisory specialists to help you evaluate the potential benefits and tradeoffs, understand how an ESOP compares with other exit strategies and determine whether employee ownership fits your goals for the future. The right succession strategy starts with asking the right questions.
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Bringing more than 20 years of experience in banking and finance, Jason has partnered with businesses of all sizes, from sole proprietors to publicly traded companies, to drive long-term financial and operational success.
