10/11/2024 | Press release | Distributed by Public on 10/11/2024 15:41
Multiple converging trends make Employee Stock Option Plans (ESOPs) an increasingly attractive exit option for business owners. From a demographic perspective, the wave of Baby Boomers exploring how to transition out of their businesses and into retirement continues. There's also growing demand from employees who want a stake in their company's success, as well as tax benefits for owners and employees alike.
"We're looking at more and more companies taking this route versus other ways to sell, as they realize the tax and other advantages that ESOPs provide," says Jason Muhme, Northwest Bank's ESOP finance lead.
The National Center for Employee Ownership reports that there are roughly 6,500 ESOPs in the U.S. Muhme added that 350 to 400 new ESOPs were created last year, and he expects to see even more in 2024. For business owners who are planning for retirement or an exit, ESOPs provide some unique benefits that merit investigation - along with a few considerations.
An ESOP is an employee benefit plan that enables employees to gain ownership of their company. Effectively, the business owner sells the company to a trust for the employees, and the employees earn shares as part of their workplace benefits. A company may fund an ESOP by putting cash into the trust or borrowing funds to make the transaction.
While the funding mechanisms and exact structure may vary, many business owners opt for ESOPs because they:
The shared ownership creates a strong incentive for employees to sell more or do what they can to improve company performance. The same goes for being mindful of operating expenses.
As with many business decisions, ESOPs also come with some considerations. For example, Muhme says ESOPs increase companies' reporting and administration requirements. Companies want to ensure their plans comply with Department of Labor, IRS and ERISA regulations. Third-party administration and expert financial advisors can help, but come with additional costs. "Still, you have the benefit of that tax-free growth, so the savings are still higher, even with the added costs," Muhme says.
If your company is using debt to fund the ESOP transaction, taking on additional debt in the future may be more challenging. Muhme notes that it's still possible, but if you aim to acquire another company or use debt to fund significant capital expenditures, you'll need to do some strategic planning. "You may need to wait or not borrow as much as you originally anticipated," he notes.
Even with these considerations, the upside of ESOPs continues to make them an attractive exit option for many business owners. If you want to learn more about how an ESOP could facilitate your business or retirement transition, connect with Northwest Bank today.