Let’s start here: Companies with employee stock ownership plans don’t pay federal income tax on the plan’s share of the profits. That’s right: if the ESOP owns the whole company, it pays zero income tax. It sounds too ridiculous to be true, but it’s true. And it’s not a loophole. It’s a deliberate attempt to encourage employee ownership.
Which raises an obvious question: If ESOPs are so great, why aren’t there more of them? To address that question, I’m hosting a webinar conversation on Tuesday that will feature two business owners who have taken the leap and one who is open to the possibility. Joining me will be Jim Kalb, who has implemented an ESOP at Triad Components Group in San Diego; Jeff Taylor, who has implemented an ESOP at Crafts Technology in Chicago; and Jay Goltz, who has thought about it for his Chicago business, the Goltz Group—but has lots of questions.
To prepare for the conversation, I’d love to hear from you. If you have experience with an ESOP, tell us in comments what you think and whether you’d recommend it. If you’ve thought about it but hesitated, tell us what stopped you. If you just have questions, tell us what they are.
A few years ago at a networking event I ended up sitting next two two CEOs having this same discussion...one converted his company to an ESOP and the other was considering it. After I left them and the dinner, two questions popped into my mind: 1) Do CEOs who convert their companies to an ESOP tend to fall into two groups: A) Those who make the move first and foremost for philosophical reasons or B) those who make the move first and foremost because of benefits like tax benefits? And if #1 is true, is there any correlation between the success of the transition and the original intent of the CEO? Just curious.
Good question Loren. I feel very much like a CEO. I appreciate the wisdom, oversight, and the accountability that this group gives me. This is just one more area to be very intentional about who is doing what and managing expectations. I am in no way hindered in my role but quite the opposite, feel like I can operate with much more confidence knowing I have a solid sounding board who can help me reach the goals of the company. These are accelerators, not hinderances.
Huge ESOP fan having converted our S Corp to 100% S Corp ESOP in 2011. I had many of your concerns listed Gay. Revenue is not so much the measure but how many people, most say around 25 employees to make it cost effective. Most important advice I would have is be intentional about everything. Have a strong board and trustee who are aligned with your vision. For me this means we are intentional about our ownership model as we work to build a 100 year employee owned company. Also need to be very intentional about repurchase obligation keeping plenty of cash on hand to pay retiring or exiting employees. Happy to heave a side conversation and share my experiences if I can help.
CORRECTION: When I wrote this, I inadvertently referred initially to an ESOP as an "employee stock option plan." I meant to write, of course, "employee stock ownership plan." My apologies for making an already confusing topic a little more confusing.
I have lots of questions about ESOPs. Been thinking about them for a while for our company. They sounds great on paper but the execution scares me. Here are a few:
-How much revenue or profit do you need to have for an ESOP to make sense?
-What should the average tenure at the company be for an ESOP to make sense? You don’t want to give away shares of the company and then have the ownership walk out the door.
-If the owner does the right thing and sells to ESOP how do you keep the ESOP from turning around and selling to private equity or something.
-What advantages does an ESOP have over Open Book Management and a good profit sharing program?
A few years ago at a networking event I ended up sitting next two two CEOs having this same discussion...one converted his company to an ESOP and the other was considering it. After I left them and the dinner, two questions popped into my mind: 1) Do CEOs who convert their companies to an ESOP tend to fall into two groups: A) Those who make the move first and foremost for philosophical reasons or B) those who make the move first and foremost because of benefits like tax benefits? And if #1 is true, is there any correlation between the success of the transition and the original intent of the CEO? Just curious.
Here are a few questions I have been pondering:
Is there a certain size of company threshold that should be attained?
Did these owners announce ahead of time to employees about the transition to ESOP? If yes, how far in advance?
How have the owners stayed involved? What did/does their transition plan look like?
Are they glad they did it? Wish they had done it sooner?
Good question Loren. I feel very much like a CEO. I appreciate the wisdom, oversight, and the accountability that this group gives me. This is just one more area to be very intentional about who is doing what and managing expectations. I am in no way hindered in my role but quite the opposite, feel like I can operate with much more confidence knowing I have a solid sounding board who can help me reach the goals of the company. These are accelerators, not hinderances.
Huge ESOP fan having converted our S Corp to 100% S Corp ESOP in 2011. I had many of your concerns listed Gay. Revenue is not so much the measure but how many people, most say around 25 employees to make it cost effective. Most important advice I would have is be intentional about everything. Have a strong board and trustee who are aligned with your vision. For me this means we are intentional about our ownership model as we work to build a 100 year employee owned company. Also need to be very intentional about repurchase obligation keeping plenty of cash on hand to pay retiring or exiting employees. Happy to heave a side conversation and share my experiences if I can help.
CORRECTION: When I wrote this, I inadvertently referred initially to an ESOP as an "employee stock option plan." I meant to write, of course, "employee stock ownership plan." My apologies for making an already confusing topic a little more confusing.
I have lots of questions about ESOPs. Been thinking about them for a while for our company. They sounds great on paper but the execution scares me. Here are a few:
-How much revenue or profit do you need to have for an ESOP to make sense?
-What should the average tenure at the company be for an ESOP to make sense? You don’t want to give away shares of the company and then have the ownership walk out the door.
-If the owner does the right thing and sells to ESOP how do you keep the ESOP from turning around and selling to private equity or something.
-What advantages does an ESOP have over Open Book Management and a good profit sharing program?