5 Reasons Why ESOPs Are a Popular Exit Strategy for Business Owners
Have you ever considered an ESOP as an exit strategy for your business?
You might want to. Here’s why.
What Is an ESOP?
ESOPs (employee stock ownership plans) are well known in our upper Midwest business community.
The structure has been in existence for just 50 years. Despite that relatively short time, as recently as 2021, there were over 6,500 ESOPs in the U.S. with nearly 11 million employee owners (EOs).
ESOPs have become a popular avenue for business owners who want to exit their company, but who also want to help secure their legacy and stay somewhat involved in the business.
5 Benefits of ESOPs
We at Blueprint have had the chance to serve as senior advisors to several different ESOP companies and have also served on the boards of directors for some of these companies.
What we’ve learned through these experiences is the ESOP structure has multiple benefits. Here are five:
EOs have a direct positive impact on the performance of the company and benefit from their efforts, especially when working well together as a team.
The structure creates an environment to successfully build a true culture of ownership throughout the company.
All shareholders realize tax-free growth of returns until they retire or terminate.
EOs get the opportunity to build a significant personal retirement account in addition to other, more traditional retirement plans in which they can also participate.
All stakeholders always know the value of the company, which creates a more transparent, trustworthy, and informed work environment.
4 Limitations of ESOPs
ESOPs do have some limiting factors. Here are four:
Typically, there is a valuation discount for the sellers vs. other options for the sale of the company.
A high degree of leverage and annual debt service is required for the first several years of existence.
The initial transaction costs are high, and the ongoing annual professional fees to support ESOP governance requirements can also be expensive.
Some industries and companies will not embrace the structure and realize the potential benefits because of the nature of their business or the culture that exists in the company.
Wondering if You Should Consider an ESOP for Your Business?
Based on our experience, the benefits of the ESOP structure outweigh the costs for the right situation.
We are blessed to have tremendous resources in our local business communities to support the ESOP structure. This takes some of the fear of the unknown out of the equation.
If you would like to discuss ESOPs or any other business transition topic, we would enjoy talking with you.
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