As a trusted advisor to business owners, you may be asked about Employee Stock Ownership Plans (“ESOPs”) and may be looking for answers on how to discuss them with your clients. While ESOPs have been around since 1974, many myths and misconceptions still exist around selecting an ESOP as a way for a business owner to exit the business partially or completely.
What is an ESOP, and What are its Benefits?
To be prepared when a client asks you whether an ESOP may be right for their company, here are some important facts about ESOPS:
Who Makes a Good ESOP Candidate?
An owner may feel that an ESOP makes sense for their company because selling to an ESOP usually allows the selling shareholder to stay with the company for a period of time (which is rarely possible with a third-party buyer). It also gives the owner pride to sell the company to the employees who, in turn, will carry on the company’s legacy. Keeping ownership in the hands of the employees will avoid the potential loss of jobs that may occur if the business is sold to an outside buyer. These positive points may tip the scales toward the implementation of an ESOP rather than a sale to an outside buyer—even if selling to a third-party may net the owner a higher selling price.
Prairie has found that strong candidates for ESOP ownership are companies that are profitable and growing, have a strong management team and a solid operating model, wish to retain their independence, have the capacity to take on debt and repay the selling shareholder over time, and have an owner or owners that are looking for a tax-favored exit.
In terms of size, ESOPs have proven successful in small local businesses with as few as 15 employees to large multi-national corporations with billions in value. The key to success is making sure the transaction structure is aligned with company needs for ongoing operations, seller expectations and a sustainable retirement benefit level.
Do ESOPs Last?
The resilience demonstrated by ESOP firms is leading to increased interest in ESOPs. A recent study conducted by Rutgers University and market research firm SSRS found that workers whose companies provide ESOPs fared better overall during the COVID-19 pandemic in the areas of job retention, pay, benefits and workplace health and safety than companies without them. The study also found that, during an economic downturn, companies with ESOPs are nearly six times more likely to anticipate their business will return to its pre-crisis level of performance than non-ESOP companies.
Why Should You Care about ESOPs?
Being part of the team that works on the sale of a business to an ESOP offers CPAs numerous opportunities:
For these reasons, we encourage you to learn more about the numerous benefits offered by ESOPs to both selling shareholders and their CPA firms. Since employee ownership is one area in which Prairie focuses for its clients—we have advised over 500 companies on various issues that arise in running an ESOP company—our website offers a myriad of resources that can help you gain further knowledge on the topic. Should you wish to discuss opportunities related to ESOPs in greater detail, please feel free to contact us directly.
Hillary Hughes is a Director at Prairie Capital Advisors, Inc. She can be contacted at 319.366.3045 or by email: firstname.lastname@example.org
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