Why Now Is a Good Time to Consider ESOPs
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An Employee Stock Ownership Plan (ESOP) is a retirement plan that provides a company’s employees with an ownership interest in the company where they work. An ESOP is a retirement plan that purchases shares of a company and holds them in an ESOP trust on behalf of employees until the employee retires or leaves the company. When the company’s share price rises or falls, the plan participants share in the gains or losses. When an employee leaves the firm, he or she is paid a market value for their ownership stake in the business.
In addition to advantages for employees, ESOPs present unique opportunities for businesses and based on various studies, have been found to be more resilient than non-ESOP companies in retaining jobs, benefits, and workplace health safety during economic crises and recessions.
Researchers from Georgetown University's McDonough School of Business concluded that on average, ESOPs fared far better than other firms during the Great Recession of 2008. The authors found that ESOP companies continued to hire, invest in their businesses and expand their contributions to employee retirement.
Similar studies support the theory that employee-owned firms have a better chance of survival during economic turmoil. A 2017 study, “How Did Employee Ownership Firms Weather the Last Two Recessions?” from the W.E. Upjohn Institute for Employment Research, determined that the rate of disappearance for ESOPs was 5.2 percent compared to 7.6 percent for non-ESOP firms.
The authors point out that when ESOPs survive challenging times, it’s not just the companies that reap the benefits, “employee ownership could be used as a policy tool to curb unemployment during recessions.”
Top 3 Reasons to Consider ESOPs
During times of uncertainty, ESOPs tend to provide more stability for their employees. And with the fallout from the COVID-19 pandemic still ricocheting through the global economy, establishing an employee stock ownership plan could be a good option for selling owners, companies and employees for the long-run.
1.) ESOPs are mutually beneficial.
Employee-owners have a lot at stake. Their income, opportunity, savings and thus, quality of life, is directly dependent on the success of the company. So it’s no surprise that employee ownership boosts employee motivation and engagement, which leads to higher productivity. And a highly-productive team makes for profitable businesses.
Studies show that ESOPs outperform conventional firms while employee wages and retirement assets also surpass those of workers in comparable non-ESOP companies. Employee-ownership benefits also assist in recruiting and retaining top talent, which reduces turnover and adds profit to your bottom line. ESOPs prove to be a win-win for a lot of firms, both big and small.
2.) ESOPs offer tax advantages.
The U.S. government has granted numerous tax incentives to companies set up as ESOPs. These advantages can benefit not only the company but also the employees, lenders and selling shareholders. From tax-deductible contributions (including cash, stock and dividends) to the deferment of capital gains taxes by way of section 1042, ESOPs can be an attractive exit and business strategy for owners.
3.) ESOPs safeguard a company’s mission, vision and values.
Owners concerned with their legacy, employees, and preserving culture and core values, would do well to look at the possibility of an ESOP conversion. Throughout a company’s life cycle a lot of effort is put into cultivating a good culture and reputation. ESOPs allow you to retain the core values that have guided business decisions while also taking into account your staff, customers and community well into the future. For independent and family-owned businesses, ESOPs offer an attractive succession plan, as they can help build sustainability for the firm’s next generation of employee owners.
While ESOPs provide a lot of advantages, they are not right for every situation. At EPOCH Pi, ESOPs are just one of the alternative structures that we specialize in. Using a proprietary process that includes values and culture assessment tools and integration planning, we work to find the solution that is best for you and your company. By focusing on options that align with your mission and values, we can strike the perfect balance without sacrificing enterprise value.