Mature BusinessBENEFITS

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  • ESOP & the Next Generation

    Game Plan


    What Are The Advantages of Selling to Employees

    If you are seeking to finance your business transition, ESOPs provide a qualified market of buyers for your business: your employees. Experienced and skilled employees can help your business continue to thrive after you sell. This is a crucial edge for business owners who don’t have qualified family or partners to succeed them, but it isn’t the only advantage of an ESOP.

    In survey after survey, employers cite benefits as one of the most important factors in attracting and retaining a qualified workforce. According to professional services company Towers Watson, the percentage of workers younger than 40 who cited their retirement program as an important factor in accepting their jobs jumped from 28% to 63% in just two years.

    As a qualified retirement plan, an ESOP has tax-friendly features, and they compare favorably to other qualified plans. Companies make virtually all contributions to an ESOP—they cost employees nothing. These payments generally range between 6% to 8% of pay, compared to an average 4% contribution by non-ESOP plan sponsors. ESOPs also sport higher rates of return, lower volatility and, consequently, much higher account balances. The National Center for Employee Ownership (NCEO) offers more information. 

    One final edge ESOPs seem to give business owners is increased productivity. An ESOP Association survey reports that 77% of companies say ESOPs increased productivity. Between 70% and 78% reported increased profits and revenue. Not surprisingly, 94% said creating employee ownership through an ESOP was a good business decision.

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    Game Plan

    • An ESOP is a retirement plan and a succession plan. To prepare for the latter, make sure qualified management is in place to ensure your company’s legacy continues after you cash out.
    • Employee benefits are only as good as a company’s ability to communicate their value. Communicate the benefits of your plan plainly and clearly through channels they are comfortable with. The NCEO publishes a book about how to communicate ESOPs to employees. You can order it here.
    • ESOPs have many of the rules and restrictions of other qualified retirement plans, such as 401(k) plans. Work with an accountant who is familiar with this type of plan to ensure you comply with your plan’s rules.