When most people hear Employee Stock Ownership Plan (ESOP) they think exit planning (or maybe nothing at all). That’s not surprising given that historically ESOPs have been positioned as a succession planning approach.
Here’s an example, a key partner at a manufacturing company wants to retire, but the remaining partners can’t afford, or don’t want to buy him or her out. An ESOP could be used by the remaining partners to fund the buyout of the partner that’s leaving in order to avoid divesting the company.
However, to think of ESOPs as only a tool for exit planning sells them short. Let’s broaden our perspective for a second.
The average business owner has 79% of their net worth tied up in the value of their business*. If you told just about any financial professional that you had 79% of your net worth tied up in any one investment they would likely have one word for you – DIVERSIFY!
An ESOP can allow a business owner to diversify their holdings by selling all or a portion of the business to the ESOP. The owner remains in control of the business but has generated liquidity to allow for the purchase of alternative investments.
Using an ESOP to create liquidity to diversify can be used with business owners of all ages and can be a first step towards exit planning.
Although the business owner is likely to think of the ESOP in terms of exit or liquidity the employees clearly think of it in terms of retirement readiness. Employees earn shares over time and can see the value change as the business value changes. For many, the ESOP may be their largest source of retirement savings.
Employees see a return on their sweat equity and are able to share in the success of the organization that they helped to build.
ESOPs can help an owner exit their business, diversify their portfolio, and contribute to the retirement readiness of their employees.
In addition to blogging here, I also tweet regularly about topics of interest to ESOPs @jlripperger.