The Intangible Benefits of an ESOP

      An Employee Stock Ownership Plan (ESOP) confers many advantages, including tax efficiency, liquidity, and other tangible benefits. However, an ESOP can also provide many intangible benefits that may not be visible or measurable. These can be equally – if not more – important than the tangible benefits.

Here are several impactful intangible factors associated with ESOPs:

      1. Ability to Achieve Multiple Transfer Objectives – Transitioning the ownership of a private company is the most difficult and complex situation most business owners will ever face. While money is always an issue, there are several additional factors that are important to consider, including maintaining the company’s legacy, ensuring jobs are secure, rewarding employees, supporting the surrounding community, and sustaining the owner’s role in the business they built. Selling to a third party often precludes the ability to meet all of these objectives, whereas an ESOP gives an exiting owner the ability to achieve more of them.

      2. Control – An ESOP offers the selling owner a great deal of control throughout the transaction process and even after the transaction is complete. While separate advisors represent the company and the ESOP, the transaction is generally more cooperative than when an outside third party is involved. Plus, it is very common for the same executive staff to still be in place after the ESOP transaction, which would not necessarily be the case in many third party sales.

      3. Owner’s Ongoing Role in the Business – With most other transition options, the transfer of the company’s ownership also means a transfer of the leadership. An owner may need to transition ownership but may not be ready to fully exit from the day-to-day activities of the business. Selling to an ESOP affords an owner the ability to exit at their own pace.

      4. Transformative Culture – Many ESOP companies experience significant improvements in morale and culture because everyone is an owner. This shared purpose and responsibility brings people together for a common goal that benefits the company and everyone involved. This cultural shift does not come easily though, and the companies that do it well invest serious effort in employee engagement and communications.

      5. Rewarding Employees – Taking care of long-time, loyal employees is often a significant motivating factor for owners considering their exit strategy. An ESOP offers a way to reward employees by providing them with a long-term ownership incentive plan for their retirement while maintaining their job security.

      6. Community/Job Creation – ESOP companies tend to remain in the communities in which their businesses were built. This is in contrast to companies that are sold to third parties which often move, resulting in lost jobs in the community.

      7. Gradual Leadership Succession – Since a sale to an ESOP does not require an automatic change in management and leadership, companies can continue to work on their succession plans before and after the ESOP transaction. This flexibility allows the company to complete a transaction which will meet the owner’s transition goals while working on the management succession at a gradual pace.  

      8. Better Performance – Data tells us that when employees are given ownership, it positively impacts their behavior because they now have “skin in the game.” Generally speaking, an ESOP company’s performance increases over time because its employees are more engaged and productive since they now have a share in the benefits.

      9. Acquisition Strategy – An ESOP acquirer can be attractive to a selling company that is a C Corporation because the selling shareholders have the ability to defer income taxes on the sale if they elect to roll over the proceeds into qualified replacement property. This can give the seller a much higher transaction value, net of tax, providing the acquiring company with an advantage over non-ESOP buyers.

      10. Improved Recruiting and Retention – Recruiting and retaining employees is often expensive. In fact, turnover is one of the biggest hidden costs for any company. ESOPs typically have better employee retention rates because of the long-term benefits associated with the business structure. An ESOP is also an attractive recruiting tool since it offers an employee benefit that is not available in most companies.

      11. Differentiation from Competitors – ESOP companies often have unique, positive cultures because of their employee ownership. These differences become visible to the market and can serve as a point of differentiation in the way the company interacts with
its customers and suppliers. Additionally, customer and supplier relationships with ESOP companies are often viewed as more stable because the business is unlikely to be sold to a third party.

      We are seeing an increased interest in ESOPs as a  viable exit strategy. If you are considering one, take into account the broad array of both tangible and intangible advantages that an ESOP offers.

Written by Mario O. Vicari, Director, Kreischer Miller