The One-Stop ESOP Blog

Many business owners interested in exploring their options for exit strategies are intrigued by the possibility of selling to an employee stock ownership plan, or ESOP.

When employees learn that the company where they’ve worked for years will become an ESOP, they may wonder, how do ESOP plans work — and how does this qualified retirement plan have the potential to benefit them?

Smart business leaders are always looking for ways to improve productivity, raise employee morale, and distinguish themselves as employers of choice. 

So it makes sense that participative management styles are getting attention.

Participatory management can help companies cultivate leaders from within, promote employee engagement, and improve retention. These positive effects can deliver strategic advantages in an increasingly competitive labor market.

But a participative leadership style is more than just a team structure. Participative leadership is based on mutual trust, respect, and an inherent value for the perspectives and insights of all employees throughout an organization’s hierarchy.

Employee ownership refers to much more than a single corporate structure or management philosophy, and its effects on companies, employees, and even surrounding communities can be wide-ranging.

Employees can share company ownership in several ways that extend beyond stock purchases or options. Employee ownership trusts (EOTs), worker cooperatives, and employee stock ownership plans (ESOPs) all offer means for employees to share in the ownership of the company where they work.

Within this spectrum of employee ownership structures, there are differences. In fact, just from one company to the next, the employee ownership can have different impacts. One company may thrive under its chosen model; other business owners may experience problems with employee owned companies.

Among the advantages of an employee stock ownership plan, the benefits to business owners and long-term cash and tax advantages to the company often receive most of the focus.

Business owners exploring employee ownership options as part of their succession planning often need to balance multiple priorities. 

Employee-owned business models are the subject of growing attention, especially as many business owners are looking at their retirement horizons. But different models for employee ownership may be better suited for different company circumstances.

Decisions about whether, when, and how to sell a company can be some of the most challenging in a business owner’s life.

The satisfaction of having built a successful company can be overshadowed by questions, including:

• Which exit strategy is right for the owner?
• Will selling your company have a positive or negative impact on employees?
• How much control can the seller maintain over the ownership transition?

In terms of exit strategies for business owners, the leveraged employee stock ownership plan (ESOP) transaction is popular for several reasons.

Many owners of small to midsize businesses have all or nearly all their wealth tied up in their company. As they near retirement and want to diversify their investments, or experience other reasons for needing liquidity, they may explore options for selling some or all of their ownership stake in the business.

You probably already know that ESOP stands for Employee Stock Ownership Plan. 

But what does ESOP mean? Well, an ESOP is a qualified retirement plan that offers distinctive cash and tax advantages to business owners and companies. ESOPs are designed to share those advantages with employees and the communities where they live and work, too. 

The many advantages of an ESOP require an in-depth understanding of, and scrupulous compliance with, regulatory requirements under both the Internal Revenue Service (IRS) and the Department of Labor (DoL).

That means, when you transition your company to an ESOP, you’ll need to commit to understanding many new terms, concepts, and requirements.

Just as a steady flow of cash is key to a healthy company, sometimes events in life demand access to liquidity. 

Small businesses make up 99.9% of U.S. businesses and employ 60.6 million people, according to the U.S. Small Business Administration. In 2018, over half of U.S. business owners were age 55 and over. As many baby boomers prepare to retire, questions surrounding selling a small business are more relevant than ever.

But retirement isn’t the only motivation a business owner may have when deciding on an exit strategy and succession plan. Whether you’re ready for your next opportunity, facing health challenges, or need liquid cash to meet other obligations, selling is often an unavoidable stage in the life cycle of a closely-held private business.