Advantages of Employee Ownership
Invest in Your Employees
and Your Business with an ESOP
As of 2022, the National Center for Employee Ownership (NCEO) estimates roughly 6,500 ESOPs covering almost 14 million participants.
What is an ESOP
An ESOP is a retirement plan designed to provide employees with company ownership interest by investing primarily in the employer's stock. It is not like other retirement plans, which usually diversify holdings by investing in various assets.
Who Funds an ESOP
The employer funds the ESOP with tax-deductible contributions to purchase company shares. It operates through a trust under the direction of a trustee or another named fiduciary. An ESOP must comply with the requirements set forth by the Internal Revenue Service (IRS).
Why Companies Choose Employee Ownership
When evaluating your options for exiting or achieving liquidity from your business, you will face many choices. Although the most traditional method of selling a privately held company is a sale to an unrelated third party, business owners often seek to keep their business in the family or sell to management. However, not all family members have the desire or ability to take over, and management may not have the means to purchase it. In addition, an owner may seek out an ownership exit strategy that allows the owner to retain the legacy of the business, maintain the company within the local community, and permit the owner to stay involved following a change in ownership. ESOPs are an alternative approach, gaining widespread appeal as more companies recognize the unique and flexible ownership benefits.
Benefits an an ESOP
Employees remain a business’s most important asset. An ESOP involves selling a business to a retirement trust that ultimately benefits the employees. It provides economic value to the owner and significant tax and cultural advantages that would otherwise not be realized in a third-party sale.
Cash Flow: ESOP-owned companies produce more free cash flows and default less than their peers
Community: The business is more likely to stay locally owned and benefit the community
Flexibility: ESOP transactions permit the owner to sell all or part of the business and, if desired, remain involved
Job Retention: ESOP-owned companies are less likely to partake in layoffs, even during recessions
Legacy: The company name is less likely to change
Reward: An ESOP delivers exceptional benefits to loyal employees
Tax-Efficiency: Numerous tax benefits can make an ESOP transaction economically valuable to the owner and employees
Several studies conclude employee ownership enhances productivity, increases profitability, and improves employees’ commitment and sense of ownership. ESOP advocates maintain that the main variable in securing these claimed benefits is to combine an ESOP with a substantial degree of employee involvement in work-level decisions.
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