Use as directed…or maybe not.
Things often start out as one thing and end up being something entirely different. Take 3M Post-It Notes for example. Dr. Spencer Silver was a researcher at 3M laboratories working on developing a super adhesive. Needless to say he invented an adhesive that was anything but super strong. A coworker, Art Fry, saw a potential use for this adhesive – keeping his place in his hymnbook and the Post-It Note was born. I’ve written about something similar before.
Or take the Slinky. Originally the Slinky was developed in 1943 by naval engineer Richard Jones to keep fragile equipment steady on ships. Needless to say, thousands of children (and adults) have found another use for the sensitive springs.
ESOPs have multiple purposes as well.
A similar type of transition often happens with Employee Stock Ownership Plans (ESOPs). Typically, a business owner decides to sell to an ESOP to either create a liquidity event so that that they can diversify their investment holdings or allow for the succession of the business upon retirement.
The plans allow selling owners to liquidate all of a portion of their company holdings so that they can reinvest the proceeds in a diversified portfolio (business owners typically have a majority of their net worth tied up in the business). This may actually allow them to stay active in the operation of the company longer as they don’t have all their eggs in one basket.
Transitioning Ownership of the company.
An ESOP also allows the owner to create a buyer when it comes time to transition ownership which can help the company maintain its legacy. The ESOP can pay up to fair market value allowing the owner to get a fair price for the company.
But regardless of reason for implementation, what results is a qualified retirement plan. Employees accrue ownership in the company through the ESOP. When they retire, that ownership is converted into cash. The ESOP provides an opportunity to get a return on their sweat equity.
One final example; Play-Doh was originally developed as a wall paper cleaner (Kutol Wall Cleaner). As homes transitioned from heating with coal to natural gas, soot was no longer produced and the wall paper no longer had to be cleaned. Facing a significant loss of business, the firm found that the product was also being used by nursery school children as modeling clay and Play-Doh was born.
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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