Known as employee stock-ownership plans, or
ESOPs, the move is being embraced by smaller firms, especially those struggling
to find buyers during the weak economy.
Businesses are formed in many
ways, and we have come to know those varying abbreviations (S-Corp, C-Corp,
LLC, LLP, LP, LTD, and so on and so forth) that represent each varying
business. But when it comes to passing on your business, there is
another acronym to consider: the ESOP.
So, what is an ESOP, what can it
do, and is it right for your business?
ESOPs, or Employee Stock
Ownership Plans, are a tricky breed. Essentially, an ESOP is a tool recently
highlighted by Congress and featured by The
Wall Street Journal in an article titled “Founders Cash Out, but Do Workers Gain?”
Planning to exit a business is all about doing one of two things; either
restructuring the business or selling it outright. With an ESOP you accomplish
both goals and build the company around the very employees that compose the
company in the first place.
Rather than going out and
hunting for a buyer, the employees become vested in the stock ownership of
their own company. In turn, the ownership stake simultaneously becomes a
retirement asset while the ownership of the founder is bought out.
Now, if you are already familiar
with this approach, it may be worth reading the original article since there
are certain limitations affecting the employees-turned-owners. The article
gives examples of how an ESOP can work a win-win for all concerned under the
right circumstances. These examples include Bob’s Red Mill, for example, or,
from a different industry, Manson Construction Co.
ESOPS have been a powerful tool
in an otherwise soft market for business transfers. Accordingly, ESOPS are
worth a good look, and then even a second look, as a unique and proven business
Reference: The Wall Street
Journal (April 17, 2013) “Founders Cash Out, but Do Workers Gain?”