Employee Stock Ownership Plans: An under-utilized solution to a challenging dilemma

Employee Stock Ownership Plans: An under-utilized solution to a challenging dilemma

by William Stewart, Director
Client Advisor
Alex. Brown | Raymond James | Banyan Partners

ESOPs offer unique solutions, especially for founders and owners of privately held, lower-middle market companies, to the vexing challenge of developing optimal, holistic business succession strategies. While the nuances of these qualified plans can seem daunting, their inherent breadth and flexibility enhances their utility in many situations.

Often founders and owners are ambivalent about relinquishing control and/or selling their businesses despite intuitively knowing it’s on the horizon. The risks associated with selling are real and legion. An ESOP can provide an elegant, intermediate step which neither requires giving up control today nor forfeiting the opportunity for a complete sale in the future.

The traditional M&A process, which realistically becomes more readily available to companies with $3MM+ of EBITDA (Earnings before interest, taxes, depreciation, and amortization), can be the path of least resistance and offer the optimal choice for many owners. If maximizing cash is the primary objective and the markets are favorable, engaging in a formal sales process is clearly the superior alternative.

On the other hand, an ESOP is a ready and steady buyer of company stock, in any amount and in any market conditions, whenever a seller is inclined to sell shares. In fact, as a qualified plan, an ESOP can be established and sit alongside a 401(k) plan and effectively be prefunded in anticipation of an owner wanting to begin selling shares sometime in the foreseeable future. Cash accumulated in the ESOP will ultimately be used to buy shares and can be supplemented by a loan, from the company to the plan, if it makes sense. Further, the principal and the interest, on a loan to the ESOP, can both be deducted as they are treated as any other contribution to a qualified plan.

Importantly, employees are simply participants in an established ESOP trust, and therefore, do not exercise regular share voting rights, which in most circumstances, for private companies, are controlled by the ESOP fiduciaries. As participants in the ESOP trust, they are not required to receive company financial statements and only receive limited financial information through an annual benefit statement showing their number of shares and the fair market value of those shares.

Establishing an ESOP, whether you are a C-Corp or an S-Corp, can be a relatively cost effective, tax efficient and elegant solution to the business succession dilemma facing many founders and owners of lower-middle market companies. For profitable companies with 15 or more employees and more than $1MM in revenue, in any industry other than professional services (i.e. physician practices, law firms, etc.), exploring the utilization of an ESOP for you and your company could be a worthwhile exercise.

About the author:

William Stewart is team focused on helping founders and owners of lower middle market companies, and their families, successfully navigate the challenging arc of company transformation and personal transition. He can be reached at william.stewart@alexbrown.com or by phone at 443-214-7751. Banyan Partners’ website is www.alexbrown.com/banyanpartners

Contact Us

Contact Us

Don’t see what you are looking for or have a question? MRC can help. Contact us today!

Training and Certifications

MRC provides far more than certifications and funding assistance. We offer job creators access to specialized coaching, mentorship and a variety of business and marketing assistance normally outside the reach of most manufacturers.

Solutions

No matter what’s happening with your business, MRC has probably seen it. We know the problems that keep CEOs up at night, and we know how to help solve them. Our staff has more than 100 years of combined experience working side-by-side with business owners to evaluate, strategize, discover and implement solutions that address both strategic growth needs and organizational transformation.

Training & Events Calendar

MRC breaks down the barriers that prohibit manufacturers from realizing their full potential. Our proven tactics and methods can help nearly any company at nearly any stage of its evolution. Whatever the hurdle – going green, becoming lean, entering new markets, rebranding the company – MRC can help you clear it.

Workforce Initiatives

Developing Future Workforce with programs like: What’s So Cool About Manufacturing®, PA Dream Team, the Inside Manufacturing Series, and Manufacturing Day.

Resources

Through our partnerships, we are able to bring the horsepower of the best-in-breed experts to you. Imagine having access to the second-largest technology institute in the world, a corps of ex-Toyota executives trained under the best Lean practitioners in the world or world-renowned business strategy groups. MRC makes it possible.

About Us

For over 30 years, Manufacturers Resource Center (MRC) has helped small and mid-sized manufacturers become more competitive, adopt lean and agile processes, strategically grow their companies and invest more effectively in their existing human capital.

My Account

Ready to complete your event registration? Need to confirm the date of a previous registration? Find all these details here or call us at (610) 628-4640 for additional assistance.