More companies nationwide are realizing the value of Employee Stock Ownership Plans (ESOPs) and how they benefit their business and their employees. ESOPs are a way for a business owner to transition the benefits of owning company stock to its employees.
While ESOPs are popular in states with large populations like California, Texas and New York, and in states like Illinois and Ohio, Nevada has only about 23 employee-owned companies.
An ESOP is set up as a trust that purchases company shares and holds them in retirement accounts for employees. Employees are not required to contribute, but they have the opportunity to buy and receive stock. When the stock value increases or decreases, so does the value of the employees’ accounts. Having shares of the company makes employees beneficiaries of the company, participating directly in the growth and success of the company.
Advantages to the Company
ESOPs allow owners to exit partially or completely from their company on their timeline. More importantly, an ESOP can help ensure the company will maintain the owner’s original vision by helping to retain key employees and management who can continue to lead the company in the direction of strong financial growth and a thriving corporate culture.
In addition, because employees own a portion of the company, they have stronger ties and are personally invested in ensuring its success, leading to increased productivity and reduced turnover.
ESOPs can also provide tax benefits for the company, employees and selling shareholders.
Benefits for Employees
While ESOPs benefit the company, they also benefit employees. ESOPs provide employees with a retirement plan that requires no out-of-pocket contribution from them.
Employees share in the growth and success when the company performs well giving them a greater sense of belonging and larger purpose – and a higher balance in their retirement plan. Work will not just be about collecting a paycheck, but about adding value to the company.
Transitioning to an ESOP
Transitioning to an ESOP takes time, resources and a commitment from everyone within the company. As with any major decision, companies should research and learn about the ESOP process. Creating an ESOPs can be expensive. Businesses should deeply understand their company’s financial situation and the right valuation between the company’s fair market value and strategic value.
Confidence in Management
A strong management team makes a huge difference in the success of an ESOP. Having a team that has worked together, shares the same commitment, values and vision for the company will help drive the direction and communicate the goals both inside and outside the company.
A company culture based around each other, with the sense that “we’re a family, supportive, working toward a single goal,” is essentially what ESOPs are all about. A company that has an entrepreneurial spirit, where employees recognize they are the beneficiaries and how they contribute and act is going to add to the value of the company, will succeed.
Seek the Right Resources
Transitioning to an ESOP isn’t a handshake deal. It is very important to work with a team of professionals who are knowledgeable and who have experience with ESOPs. Businesses considering transitioning should seek out bankers, financial advisors, lawyers and everyone in between, but particularly professionals who have successfully helped other businesses implement an ESOP.
Josh Ford is CEO at Destination by Design.