Today’s video will help you learn the eight things you need to think about if you want to do an ESOP (Employee Stock Ownership Plan). After you watch the video let me know what you think about an ESOP in your company in the comments below.
Now that you’ve watched the video, why don’t you leave a comment below and let me know what you think about having an ESOP at your company?
I’m a big fan of ESOP’s also known Employee Stock Ownership Plans. In the right circumstance an ESOP might just be the ticket you’ve wanted to help you leave your business when you want, in the way you want to who you want.
Hi, I’m Josh Patrick, the founder at AskJoshPatrick. Thanks a lot for spending a few minutes with me.
I’ve learned that ESOP’s are complicated beasts. There’s lots of moving parts and if you decide to install an ESOP at some point you might ask why bother? At the same time, if you master the intricacies of doing an ESOP, it just might be the best decision you’ve made for you and your employees.
Lets start with answering this question….. is an ESOP good for?
I think an ESOP is best for a selling owner who has developed a good management team and wants to make sure that what they’ve created in their business continues after you, the owner move one. If you decide to sell your company to a third party, it’s almost a certainty your company will be a very different animal very quickly.
If you believe in open book management, have a good management team and your team likes the idea of having company stock owned by an ESOP, this could be a good succession strategy for you. Oh, and your company should have some size. In my opinion an ESOP works best for companies that have more than fifty employees and do more than $5,000,000 in sales.
Now it’s time to talk about who shouldn’t do an ESOP
Small companies shouldn’t do an ESOP. They are just too costly and too complicated. Also, smaller companies tend to not develop management structures and training programs to bring the next level of managers along.
Companies where managers don’t want to share ownership with all the employees are another signal an ESOP might not be a good fit for you. If you don’t think sharing information with your employees is a good idea or you really don’t care what happens with your company after you leave, don’t bother with an ESOP. It’ll be too much work for to little value and it’ll probably not work out well in the long-run.
You might have heard ESOP’s are really expensive?
An ESOP done the right way will often cost between $150,000 and $250,000 to set up. Several people from the ESOP organizations have told me it can be done for less., It’s true they can be done for less and I find that when they are done for less there are often some shortcuts used that can come back and bite you.
The best way to think about doing an ESOP is comparing the cost to what an investment banker would charge you to sell your business. If the enterprise value of your company is $5,000,000 or more an ESOP certainly won’t be any more expensive than hiring an investment banker. If the value of your company is less, you might just decide an ESOP is not for you.
I’ve heard that ESOP’s are really tax friendly, is this true?
Here’s where it gets really interesting. An ESOP can be a very attractive way of leaving your business and it can be an even more attractive way to run a business. If a business decides to become an ESOP and converts to a Sub Chapter S Corporation, the portion of the business that’s owned by the ESOP pays no income tax. Yes, you heard that right, the company pays no income tax.
If you’re a seller, it’s possible to structure the sale so you defer taxes on the proceeds you receive and sometimes that deferral can go for your entire life. At the very worst, you’ll pay capital gains taxes only on the proceeds from selling your company. In most cases your taxes will be much lower than if you sell to an outside or third party buyer.
Here are eight guidelines for doing an ESOP
1. Start with the ESOP owning a small part of the company, likely 30% to start. That way if the deal doesn’t work out you can unwind what you’ve put together.
2. Make sure you like and your employees are comfortable with open book management. ESOP’s are not required to share numbers. At the same time, those that do share performance numbers tend to have more engagement and better results.
3. Make sure your managers are in favor of doing an ESOP. Sometimes managers just want to own the company without rank and file employees sharing in the gains and losses of the business. If this is true, then don’t bother trying to ram it down their throat.
4. Make sure your company has a bright future. ESOP’s can be a real boon to employee morale. If the company hits a rough spot, the value of ESOP ownership will go down and this could cause employee moral problems.
5. Get a great team to help you assemble an ESOP. One of the reasons that a well designed ESOP is expensive is because good professionals that know what they’re doing are expensive. You want a good team. It’ll likely save you money in the long run and certainly could save you the hassle of being harassed by The Department of Labor.
6. If you want to install an ESOP go to ESOP meetings to learn about what options you have. There are often local and certainly national ESOP meetings. Most of these gatherings have sessions for those companies who are considering an ESOP. You’ll learn valuable information at these meetings.
7. Find others who have done ESOP’s and talk to them about their experience. Make sure you ask people who has done an ESOP transaction, and what they didn’t like and what they would do differently if they did their ESOP again.
8. Most importantly, take your time. This is a big decision that’s has lots of twists and turns. It’ll take you a while to get comfortable and understand the nature of the transaction. Taking time to truly understand your options will pay off in the end.
So tell me, do you think an ESOP might be in your future? What do you think works about an ESOP for you? If you’re interested let click on the button at the end of this video and let’s have a conversation.