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Can ESOPs be a win-win in business?

Much has been written about finding win-win solutions in business. Although this sounds great, in most instances it can be a challenge to actually achieve. In business transactions involve negotiation, we tend to think more in terms of win-lose. If you get the price you want I probably didn’t. The same is true with contract terms.

That doesn’t mean it is a bad conclusion. The very definition of compromise is finding a solution where everyone is equally satisfied (and equally disappointed as well).

So as business owners think about the eventual sale of their business, it is not surprising that they approach it from a win-lose perspective. Yet there is one succession strategy where this isn’t necessarily the case, selling the company to an Employee Stock Ownership Plan (ESOP).

An employee stock ownership plan is a qualified retirement plan that is invested primarily in the common stock of the sponsoring company. The plan provides a flexible way for a business owner to sell all or part of their company using tax benefits that allow for a positive outcome for the selling owner, the company, and the employees.

The tax treatment of ESOPs allows for a potentially positive outcome for everyone involved. These tax benefits have been touched upon in previous blog posts.

Yet many remain unconvinced. After all, the old adage is that if it seems too good to be true it probably is. So why ESOPS are afforded this tax status?

ESOPs are good public policy. Specifically:

  • ESOPS encourage broad ownership of companies by the employees that work there. Everyone from rank-and-file employees to senior executives can reap the benefits of their labors. If the company does well and the share price increases, so do the ESOP balances. No longer are these benefits exclusively for a small number of owners.
  • ESOPs can provide a significant source of retirement savings for employees. Given the concerns about savings rates and retirement readiness, ESOPs can be a welcomed approach for being part of the solution. Most firms that sponsor ESOPs continue to offer other retirement plans, making the plan in addition to rather than instead of for the participants.

Because of these public policy benefits, ESOPs enjoy broad bipartisan support in the United States Congress. If our elected senators and representatives can agree, maybe you should take a look as well.

In addition to blogging here, I also tweet regularly about topics of interest to ESOPs. Click to follow me on Twitter –  @jlripperger.

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The subject matter in this communication is provided with the understanding that The Principal® is not rendering legal, accounting, or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.
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