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Employee Ownership News

Benefits of an ESOP, by Jorge Tarajano

An Employee Stock Ownership Plan (ESOP) is a great way to sell your business. As someone
who led our company from family-owned to employee-owned, I have experienced the benefits
of ESOPs.

Many business owners believe ESOP’s are complicated and do not consider it an option when
selling their company. Although ESOP’s are a retirement plan with specific requirements, they
should be viewed as a way to exit your business over time to the people who helped build it. It
is analogous to giving your employees a house and asking them to pay the mortgage over time
to build ownership.

When considering an ESOP, it is critical to determine your personal and professional goals as
well as your financial needs. Ask yourself, how much longer you want to work in the business
and when will your organization be ready for you to leave? In the end, an ESOP gives you
greater control over the timing of these steps for your financial future.
In addition to the ability to tailor the transition, there are other key benefits that you should
consider:

1. Greater Certainty: Business owners who pursue an ESOP option have a higher likelihood
of closing versus a traditional sale to a third-party. Despite current economic
uncertainties, ESOPs have and continue to close.
2. Seller Friendly: ESOPs are a friendly transaction. Transaction terms are negotiated, and
due diligence is performed, but sensitive information is only disclosed to professionals
working on behalf of the ESOP.
3. Tax Efficiencies: Business owners who pursue an ESOP can design an ESOP to maximize
after-tax proceeds versus a traditional sale where a buyer may dictate the deal
structure. The federal government encourages employee ownership through favorable
taxes: S-Corp ESOP companies do not pay federal taxes leaving substantial cash flow to
the company and for retirement benefits. Sellers may also benefit from deferral of
capital gains taxes through IRS Code 1042.
4. Company Performance: ESOP companies outperform their peers, exhibit higher
profitability and employees enjoy greater job stability.

According to the National Center for Employee Ownership:
 93% of ESOP companies found that creating an ESOP was “a good business decision
that has helped the company.”
 76% of ESOP companies found that the ESOP positively affected the overall
productivity of the employee
 2.4% annual sales growth difference from pre to post -ESOP performance.
 ESOP’s show a 10% higher net profit margin and 5.6% higher return on equity.

The financial benefits and the opportunity to create a legacy for employee-owners steered me
to an ESOP. Today, I see the same employee owners dedicated to values of ownership and
achieving continued success - personal proof that ESOPsn work.

 

Jorge Tarajano is a collaborating consultant at SSA Consultants. He serves as Board Chairman of the Tennessee Center for Employee Ownership and Chairman of Pala Group, a family-owned business that is now a thriving ESOP.