In the past decade, Employee Stock Ownership Plans (ESOPs) have increased in popularity as a way for business owners to exit while keeping things “business as usual.”
Traditional exit strategy methods such as gifting ownership of the company to another family member or selling to a third party are no longer the only options for owners who want flexibility and less disruption to business.
ESOPs are a qualified retirement account where employees receive company share, and studies have shown ESOP companies often have stronger financial performance, employee retention, employee satisfaction than non-ESOP companies.
With that, there’s no doubt ESOPs provide many benefits for both owners and employee-owners. In this article we will discuss the top five benefits to selling your company to an ESOP.
Increased Employee Engagement
An ESOP gives employees an “ownership stake” in the company via their shares by tying their retirement benefits to the success of the business. This financial stake can lead to increases in productivity and performance improvement. ESOPs can be a great morale booster.
Employees are also motivated to stay loyal to a company and not leave because of the vesting process for shares. The vesting process is a period of time that the employee must work before being entitled to the full value of their share of exit payout.
Attracting Top Talent
Offering the opportunity to participate in an ESOP be a way to attract top talent as well. A secure ESOP retirement plan can be a differentiator from competition and allow you to go after top talent in competitive industries. The company culture is often strong at ESOP companies because the employees have a stake in overall performance, and this can be attractive to prospective employees as well.
Flexible Exit Strategy for Owners
As company owners look beyond traditional methods for more flexibility and optionality, selling to an ESOP can accomplish that. As part of the ESOP transaction, owners can avoid the hassle and unknown of selling to a third party. They can keep the company’s information private and avoid deal fatigue. Instead, they could sell the company to their employees either 100% at the initial transaction or over time in tranches depending upon the owners preferences. Owners who desire can still remain involved in the company under their current role or some other position as negotiated as part of the transaction.
One reason ESOPs are attractive exit strategies is they provide tax advantages that traditional exit transactions don’t provide. For C-Corporations, if the ESOP transaction is greater than 30% of the Company, the owners could defer payment of capital gain. Also, the contributions made to an ESOP plan are tax deductible. For S-Corporations, the portion of shares owned by the ESOP are tax-exempt on a federal and state level and contributions are tax deductible. For a 100% S-Corporation ESOP Company, this means no income taxes are paid at the corporate level which means this excess cash flow can be used to pay down transaction debt, make strategic acquisitions, or available for distributions.
No Change in Governance
Another benefit of an ESOP plan is that the exiting owners do not have to worry about any significant disruption of a change in leadership or governance. Owners can often define their role in the business moving forward, and management teams can be kept intact. Consistency in this area also helps keep employee morale and engagement consistent.
These are just five of many benefits to selling your company to an ESOP rather than a third-party. For owners who want financial benefits, flexibility, and business continuity, it’s an attractive option to consider.
To learn more and learn how an ESOP can benefit you and your business, contact us today.