Is an Employee Stock Ownership Plan Right for Your Small Business?

Is an Employee Stock Ownership Plan Right for Your Small Business?

There are some good reasons why you should consider an employee stock ownership plan.

The SBA reports about 70% of privately owned businesses will change hands in the next decade and a half. The $10 trillion price tag will be the biggest intergenerational transfer of wealth in American history.

Some small business owners are ahead of the curve. Here’s one employee stock ownership plan example demonstrating this. The CEO of Harpoon Brewery, Dan Kenary gave his employees 48% ownership back in 2014. The employee stock ownership plan (ESOP) was managed by J.P. Morgan.

Small Business Trends contacted Regina Carls, head of ESOP Advisory for J.P. Morgan Commercial Banking to find out if these make a good strategy for small business owners and why.

“An employee stock ownership plan (ESOP) is a qualified retirement benefit plan,” she writes. “It’s designed to provide employees with ownership in the company. They can invest in the company’s stock.”

There are a few great reasons why these ESPOPs appeal to business owners too. Carls explains how they become a useful HR tool.

“Companies that have formed ESOPs report they foster an ownership culture that builds morale and boosts retention. Employees view their jobs as more of an investment in their own futures.”

So, an employee stock ownership plan can help you attract and keep the right people. Of course there are more bonuses for the business owner. Like a tax advantage if you’re planning on staying put.

Take our “Is an Employee Stock Ownership Plan Right for My Business?” quiz.

An Employee Stock Ownership Plan for Succession

Then there’s the folks who are looking for an exit strategy. Carls says these ESOPs are a win-win for the owner and employee both.

“They provide owners with significant tax benefits and the flexibility to exit their business by allowing them to sell between 1 and 100 percent of their company shares to the ESOP,” she writes. “The creation of an employee-owned structure allows owners to pass their legacies on to those who helped to create it. Employees will often work even harder to continue to increase the company’s future growth.”

Example Criteria

There are a few benchmarks a company should meet to get the most from an ESOP. They should have a strong cash flow and well established sales profits and sales. A good management team in place and an annual payroll of $1 million or higher is important.

How an Employee Stock Ownership Plan Works

Here’s the levers you’ll need to pull to get one of these up and running.

“ESOPs are funded by employers with tax-deductible contributions in the form of company stock or cash, which is used to purchase company stock,” Carls says.

They operate through a trust, under the direction of a trustee or someone else named to that role.

Finally, Carls names one last double-edged benefit.

“ESOPs are the only qualified retirement plan permitted to borrow money to purchase company shares.”

This allows small businesses the legal room to make a big sale to the ESOP.

Image: Depositphotos.com

This article, "Is an Employee Stock Ownership Plan Right for Your Small Business?" was first published on Small Business Trends



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