The Truth About Employee Stock Ownership Plans

With a new year comes a fresh way of thinking about things, and is a time many business owners begin thinking about long-term plans for themselves personally as well as their business. As a part of this process, it’s typical to discuss succession planning and how to capitalize on the value they’ve built into their business over time. Many business owners think their only options for liquidity include selling the business outright to a competitor or private equity buyer and risking their employee base as well as the culture they’ve worked so hard to create. One option that is often overlooked is an Employee Stock Ownership Plan (ESOP) – a qualified retirement plan that allows stock to be allocated to the employees over time while providing the business owner with a market value price for the sale of their privately held stock. With ESOPs increasing in popularity, it’s important to know if one is right for your business.

Let’s take a look at how ESOPs can benefit the owners of privately held businesses, as well as the employees who work for them.

How does an ESOP benefit a business owner? What’s in it for the employees?

When a business owner starts to consider an ESOP, one of the first questions their wealth advisor will hear is “well, what are the benefits?” For employers, this type of stock ownership plan comes with a host of benefits, including:
● A market for their business’ privately held shares
● Substantial tax benefits for the business owner and company
● Preservation of the company’s independence and culture

The benefits to employees are ample, as well:
● Rewards employees with company stock at no cost to the employee
● Allows employees to feel like, and truly be, an active participant in the company’s success

Another major benefit to an ESOP is succession planning – an ESOP allows the business owner to smoothly transition out of the company without finding a third-party buyer and affords employees the opportunity to benefit simultaneously.

So how does an ESOP work and is it right for your business?

Employers control the vesting period and contributions are allocated to full-time employees annually based on their salary. Employees later receive their portion at termination, disability, death or retirement.

ESOPs may be a fit for your business if:
● You are looking to gain some liquidity for your business while transitioning the management over time.
● You want to maintain your company culture while rewarding your employees in an innovative way.
● Your business is successful and profitable.

The bottom line
ESOPs have many benefits and can be the perfect exit strategy for a business owner. In addition to the tax benefits, this structure offers employees a chance to be part of their company’s overall success and encourages them to perform at their best. However, ESOPs are not right for all businesses, so before making a decision, consult your wealth management advisor to see if an ESOP is right for you.

John O’Rourke is a Private Banker and Wealth Advisor in South Florida for First American Bank. First American has a specialty ESOP group that’s been in the market for more than 25 years. If you have any questions or comments, contact John at Jorourke@firstambank.com. First American Bank investment products are Not FDIC Insured, Not Bank Guaranteed, and May Lose Value.


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