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ESOPs: What to Expect When Transitioning

May 22, 2017

So you've chosen an ESOP as a tool to transition ownership. Great! But what does this really mean?

Letting go of the reins can be a challenge for any business owner, especially for owners and founders who have spent decades investing in the success of their companies. Using an ESOP to move toward retirement is somewhat like a happy medium, providing a way to relinquish control while still maintaining ties. However, this doesn't make the process easier for those who are unsure about the changes that come with surrendering ownership.

Contrary to normal perceptions of corporate succession, using an ESOP doesn't have to mean big changes. Here's what to expect when transitioning away from ownership with an ESOP.

Voting Rights

Voting rights can be a sizable concern for those relinquishing ownership. While employee opinions are frequently valued, there's a difference between listening to suggestions and voting to make those suggestions into a point of governance.

The nature of sharing voting rights with employees is often considered a major disadvantage of ESOPs, but in reality, it’s not even a point of consideration. While it’s true that an ESOP does provide voting rights that accompany shares of stock, the plan participants don't receive these privileges: the ESOP itself does. This means that the ESOP, or rather its trustee, is the party permitted to vote on company issues. And, as the trustee is appointed by company leadership, it’s fairly easy to choose a plan trustee who is sympathetic toward existing corporate objectives.

Employee Well-Being

The role of the employee within a company is a variable one; while employee satisfaction can be a significant driver in low turnover rates and thus cost savings, business needs often come before employee needs.

ESOPs, however, can support the well-being of both employee and employer. Despite primary functions as a business succession tool and a corporate finance vehicle, ESOPs do offer numerous advantages to employees. As a plan that rewards overall business success, employees that benefit from an ESOP are far more likely to want to see their employer prosper – after all, stock in a business that is declining isn’t worth much at all. In fact, businesses that use ESOPs often see their employees work harder toward accomplishing overall goals, as partial ownership creates a sense of loyalty and commitment to the greater good.

Business Strategy

For company owners who have put significant time and effort into growing a business, an adherence to existing business strategy is a must-have. Selling to a third party can prove to be problematic here; there’s no guarantee a new owner will have the same ideas about moving forward.

Using an ESOP to transition takes this issue off the table. By granting ownership to those already involved in the inner workings of company operations, it’s much more likely that an original business plan will stand the test of time. Additionally, employee stock ownership plans allow business owners to stay on in a leadership capacity as desired, an option that a new third party owner would likely not allow. For business owners interested in remaining involved and ensuring a commitment to existing objectives, an ESOP is an elegant way to accomplish this.

Transitioning out of business ownership is an overwhelming experience, but using an ESOP can make the process much easier. With the right plan, it’s possible to ensure voting rights, employee well-being, and business strategy all stays as close to the status quo as possible upon your departure.

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Gary Canon

Written by Gary Canon

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