Succession planning is a critical yet often overlooked aspect of running a business. Finding the right way to hand over the reins can be challenging, especially for businesses without a clear heir apparent. However, there is a solution that can benefit both the owner and the employees: Employee Stock Ownership Plans (ESOPs).
ESOPs and Industry Versatility
One of the attractions of ESOPs lies in their versatility. Unlike some succession strategies, ESOPs are not restricted by industry. Whether you run a manufacturing plant, a tech startup, or a local bakery, an ESOP can be a viable option for transitioning your business.
To set up an ESOP, a company establishes a trust that may immediately acquire all ownership shares from the existing owner(s) or gradually acquire shares from the existing owner(s) over time. The funds for this purchase most often come from bank loan proceeds, a loan from the selling shareholders or a combination of both. The shares held by the trust are then allocated to eligible employees over time, giving them a stake in the company’s success.
According to the most recent available data (2021) from National Center for Employee Ownership (NCEO), there are 6,533 ESOPs in the United States, collectively holding total assets in excess of $2.1 trillion. Of these companies, 5,866 are private, while 456 are publicly traded.
The NCEO also provides a breakdown of ESOPs by industry. Within private company ESOPs, the top five industries were as follows:
- Professional, Scientific and Technical Services – 21 percent
- Manufacturing – 20 percent
- Construction – 16 percent
- Finance, Insurance, and Real Estate – 12 percent
- Wholesale Trade – 9 percent
Within public company ESOPs, the top five industries were as follows:
- Manufacturing – 37 percent
- Finance and Insurance – 30 percent
- Utilities – 9 percent
- Management of Companies – 6 percent
- Retail Trade – 3 percent
Other industries represented in both private and public also included retail trade, waste management and remediation services, transportation and warehousing, healthcare, agriculture, forestry and fishing, food services, mining as well as arts and entertainment.
Benefits All Around
The advantages of ESOPs extend far beyond a smooth ownership transition. For the selling owner, ESOPs may offer significant tax benefits and can provide a fair market value for their business. ESOPs may also provide an opportunity for a gradual exit, where the owner may conduct a handover of ownership to the future leaders. Additionally, by transferring ownership via an ESOP, the selling owner may ensure the company’s culture and values are maintained even after their departure.
Employees, as participants in the ESOP, gain a sense of ownership and a stake in the company’s performance, which leads to an increase in motivation and productivity. The NCEO reports that ESOP companies tend to outperform their competitors in terms of profitability and growth, likely earning five to 12 percent more than those at non-ESOP owned companies. In addition, as shares held by the ESOP are allocated to employee participant retirement accounts, it provides a valuable future benefit for long-term employees.
Considering an ESOP?
ESOPs offer a unique and industry-agnostic approach to succession planning. By giving employees, a stake in the company, ESOPs can foster a culture of ownership, boost performance, and provide a win-win situation for both the selling owner and the employees.
If you are nearing retirement or simply looking for a strategic exit plan, an ESOP could be the answer. Consult with ESOP professionals like Windham Brannon to determine if an ESOP is the right fit for your specific business. We can help you with the general concepts, accounting and tax implications and connect you with ESOP professionals to assist with the specific design that aligns with your goals.
For more information, contact your Windham Brannon advisor or reach out to Donna Caruso, Windham Brannon’s ESOP Practice Leader.
