Long-Term Succession Planning and the Benefits of ESOPs to Employees, Owners, and Society

ESOPs from a Financial Planning Perspective is an informative article in the Spring 2008 edition of the ASPPA Journal (page 13) that provides a big picture look at ESOPs. It discusses the lack of long-term succession planning and the benefits of ESOPs to employees, owners, and society:

Long-Term Succession Planning

Most entrepreneurs, according to Michael Gerber, end up in business because of an "entrepreneurial seizure," not because of a well-thought-out business plan. Twenty years later they wake up to find that they have a high net worth with little liquidity, a profitable enterprise and a core group of loyal employees who matter very much to them. Yet they have done no long-term strategic planning.

For more information, check out: Four Common Ways to Sell a Company

ESOP Benefits to Employees

ESOP employees get a real stake in the business they work for, tend to have richer benefits packages than at non-ESOP companies (source NCEO.org) and retire with significantly more money than they ever would have without the ESOP. ESOPs are good for employees, and being good for employees makes them good for communities.

For more information, check out: The Benefits of ESOPs and Employee Ownership to Employees

ESOP Benefits to Owners

But the ESOP, first and foremost, must be about the owner. Before an ESOP can do good things for employees and communities, the owner must benefit or the ESOP will never happen. Determining an optimal strategy for benefiting the owners is remarkably complex, yet is often simplistically represented as being a question of tax deferral. The reality is not so simple.

For more information, check out: The Benefits of ESOPs and Employee Ownership to Companies

ESOP Benefits to Society

As I tell clients, I have a selfish motive for liking ESOPs—I live in my community and believe that private and family businesses are the backbone of that community. When those businesses fail, the effects ripple across the community; when those businesses thrive, they reward their employees and the benefits likewise benefit the entire community. (See Jack Stack's, The Great Game of Business.) So while ESOPs are not for every company—they are complex, require a high level of expensive expertise and call for heightened vision and planning by management—they are a powerful component of the business succession and continuity discussion.

The study discussed in the previous two related links cites Economic Growth, Reducing Inequality? , and "Spillover": The Participating Worker and Better Citizenship as benefits to society.

The article also covers a wide variety of ESOP Topics:

• The Value of an ESOP: Smith Fabricators Company (SFC)
  
• Some Key Financial Concepts
  
  
  • Tax Deferral on Gains
  • C Corporations vs. S Corporations (Tax-exempt)
  • Distributions are Often Tied to Taxes
  • Dividends Can Turbocharge the Retirement Plan Contributions
  • Subsidies from Uncle Sam
    
    
• Subchapter ESOP Tax Rules
  
• Control
  
• ESOP Costs
  
• Managing the Repurchase Obligation