In business banking, the relationship between a banker and their clients isn’t merely transactional. In the best cases, it’s a partnership grounded in trust, insight, and mutual benefit. It embodies a lender’s commitment to understanding and fostering the growth of their clients’ enterprises.
Business owners, particularly those at the helm of closely-held companies, look for more than financial services from their trusted lenders. They often want advisors who understand their business deeply and can offer innovative solutions that align with their goals … up to and including their goals for transitioning out of business ownership.
This is where employee stock ownership plans (ESOPs) can serve as a powerful tool — not only as an ownership transition tool, but also as a strategic lever to help business lenders enhance and diversify their lending portfolios and deepen client relationships.
By incorporating the ESOP concept into their comprehensive advisory toolkit, bankers can demonstrate a profound understanding of their clients' needs, retain lending clients in perpetuity, support local employment, and promote successful businesses’ positive economic and community-building impacts.
And by working closely with a team of ESOP experts, they can help remove barriers and facilitate business ownership transitions that meet their clients’ needs, support enduring and mutually beneficial professional partnerships, and preserve clients’ legacy in their communities, too.
ESOPs: More Than a Business Transition Tool
While ESOPs certainly are an ownership transition tool, they also present a holistic solution to address a spectrum of business challenges. An ESOP creates a ready buyer for the corporation that’s guaranteed to pay fair market value. It separates the liquidity event from the owner’s leadership departure, helping ensure long-term stability and control over succession planning.
As a qualified retirement plan, an ESOP also rewards long-term employees with stakes in the company's future. Over the long term, the benefit can help individual workers build their personal wealth and strengthen their financial security in retirement.
In addition, studies confirm that ESOP-owned companies have a lower default rate than their non-employee owned peers — so they may represent a lower-risk, higher-reward lending opportunity.
Help Clients Sell Their Businesses — Without Losing Them as Customers
Business lenders face a real risk of losing their existing client relationships when those clients choose to sell to third-party buyers.
That may be one of the strongest cases for lenders and financial services providers to learn about, and advocate for, the ESOP option.
In contrast, in many ESOP ownership transitions, the selling business owner may stay on — as long as they desire — in their top leadership role. So, after an ESOP sale, as the business continues to succeed and grow under employee ownership, lenders get an opportunity to retain and even strengthen their business ties.
Looking ahead, as an ESOP, the company may need future financial services: financing for new equipment or working capital, for example. Down the road, as the ESOP matures and employees retire, the company may need investment advice and guidance to help meet their employee stock repurchase obligation. ESOPs’ overall stability and growth potential make them, in many cases, ideal financial clients.
ESOPs Help Keep Good Local Jobs in Place
Business bankers who choose to champion ESOPs can play an important role in the well-being of their communities, too. By advising clients on the potential benefits of employee ownership, lenders can contribute to local job retention and economic stability. This can be even more important in smaller markets, where finding a third-party buyer can be challenging, and sellers run the risk of their business being purchased by venture capitalists or investors with few — or no — ties to the local community.
ESOPs help dependable local employers remain rooted in their communities, preserving the founder’s legacy, as well as the jobs of the workers who contributed to the business’s success, often over years or decades.
Aligning your lending strategies with community values does more than benefit the local economy; it also strengthens your financial institution’s reputation as a supporter of sustainable local businesses.
Learn More About the ESOP Option for Your Business Lending Clients
Understanding the nuances of ESOPs is important for bankers looking to specialize and stand out as ESOP champions. That means getting familiar with ESOP annual valuation requirements, Employee Retirement Income Security Act of 1974 (ERISA) standards, Small Business Administration procedures, and leveraging recent legislative changes intended to make ESOP financing more accessible.
By aligning offerings with ESOP financing needs, banks can position themselves as forward-thinking, pro-business institutions, ready to embrace lending opportunities that are both profitable and socially responsible.
The most effective way to gain a deeper understanding, and to help ensure your ESOP clients’ needs are consistently met, is by collaborating with the experts at ESOP Partners. Our teams have the experience and insights to help you strengthen your role as a trusted business advisor and lending partner — an essential for fostering long-term, mutually beneficial business relationships.
You’re invited to explore our Lender’s Guide to Championing ESOPs, to get a clear view of the business opportunities that come with integrating ESOP-focused services into your lending portfolio and financial services offerings. Just click here to get started.
In the meantime, don’t wait to reach out to our team with your ESOP-related questions.
