The Benefits of ESOPs and Employee Ownership
ESOPs are having a moment. It’s not often that they get pop culture media attention, but a recent episode of the popular podcast Freakonomics dug into the concept of employee stock ownership programs (ESOPs) – a sure sign they are gaining traction as a viable exit strategy.
“The most common use of an ESOP by far is where you have an owner of a closely held company who wants to move on, maybe sell some or all of their ownership. And they could sell to private equity, they could sell to some other big company, but instead they’d really like the employees to be owners,” Corey Rosen, founder of the National Center on Employee Ownership, said in the podcast.
Not only are ESOPs a viable exit strategy for business owners, but they also bring a wealth of advantages to the company’s employees and its post-transaction viability. Rosen pointed to research showing that “if you take companies that weren’t ESOPs and compare them to their competitors for a few years, and then you take them after their ESOP and compare them to the same folks, you find that the difference in their relative productivity, sales, and employment are all 2 to 3 percent per year faster.”
Rosen also said that ESOP-owned companies lay people off at one-third to one-fifth the rate, have much better retention rates, and have retirement assets three times that of comparable employees’ assets in retirement plans.
As Pete Stavros, co-head of global private equity at KKR, pointed out in the podcast, most ESOPs are in the industrial or service companies. Although less common than other industries, the accounting industry has been increasingly entering into ESOP transactions – and accounting powerhouse BDO’s successful ESOP transaction may be changing the tide.
LP partner David Solomon recently told Inside Public Accounting, “When you’ve got people businesses, using [an ESOP] for the sale of a company is a very effective strategy to provide the exit to the owners and then have a legacy moving forward without just blowing up the firm and shutting it down.”
When considering an ESOP, there are a few things to keep in mind:
- The impact on talent recruitment and retention. As Steve Ferrara, Chief Operating Officer of BDO USA LLP, noted, ESOPs can help recruit and retain talent because they create significant opportunities for employees as owners.
- Impact of liabilities
- Valuation process
- Tax issues
- Demographics of partners. Partners closer to retirement may receive more cash, whereas those partners likely to be with the firm longer term receive more ownership stakes.
If you have questions about ESOPs, please don’t hesitate to reach out.
David Solomon and Kevin Slaughter will be speaking at the upcoming Dealmakers Conference on October 16, 2024 at the Union League Club of Chicago. Use promo code LEVENFELD for your complimentary registration here: www.smartbusinessdealmakers.com/chicago/event