So, what is an ESOP?

ESOP stands for “Employee Stock Ownership Plan,” which is technically a type of retirement benefit plan. ESOPs can be a really effective way for business owners to transfer ownership of their business to their employees because they help employees purchase a business without having to spend any money out of pocket, and an ESOP is technically a qualified defined contribution employee retirement benefit plan, which means workers also get tax advantages similar to a 401(k).

More on all those technical terms in a minute! In practical terms, an ESOP enables a business owner to sell company stock to their employees by establishing an ESOP trust. Company shares are placed in the trust, and the company’s profits are either used to repay the owner over time, or to repay a bank loan that the trust takes out to finance the transaction.

It’s worth noting here that contributions from the company, and not the employees themselves, fund the ESOP. Employees do not make cash contributions to the plan. Shares are allocated to individual participant accounts over time and are held in trust until a distributable event occurs, such as when an employee leaves the company.

There can be some flexibility in how an ESOP is set up, so the financing, payment terms, and who controls the company can vary from ESOP to ESOP.

ESOPs in the US today

By the beginning of 2023, there were around 6500 companies in the United States that were actively transitioning to employee ownership by setting up an ESOP, according to the National Center for Employee Ownership. From Publix supermarkets and its 200,000 employees to local businesses with 10 or 20 employees, ESOPs are a compelling way for business owners to gain liquidity while giving their employees a piece of the pie.

Why do ESOPs Matter?

It’s important to understand why ESOPs are so important. An ESOP transfers some or all of the ownership in a business from its owner to its employees. It can give an owner liquidity without losing control or be a smooth way to sell the business when an owner is ready to retire or move on.

In addition to preserving an owner’s legacy, an ESOP can create significant tax advantages. Setting up an ESOP also ensures continuity, and it rewards employees for all of their hard work. ESOPs have also been found to improve business performance by giving employees more skin in the game.

 

What Should Communities Understand About ESOPs?

Communities can benefit from a good understanding of Employee Stock Ownership Plans (ESOPs) because these plans can positively impact local economies and the overall community. Here are some key points that communities should know about ESOPs:

  • Job Stability: ESOP-owned companies tend to be more stable and resilient, which can lead to fewer layoffs during economic downturns. This stability can contribute to a healthier local job market.
  • Economic Impact: ESOPs often positively impact communities by retaining businesses, preserving jobs, and contributing to the local tax base.
  • Community Involvement: ESOP-owned companies often engage in community activities and support local initiatives, reinforcing their commitment to the areas where they operate.
  • Local Ownership: ESOPs provide a form of local ownership, as community employees become partial business owners. This can result in a stronger connection between the company and the community.
  • Sustainability: ESOPs are more likely to invest in their long-term sustainability, which can benefit the community by ensuring the continued presence of the business.
  • Training and Development: ESOPs often invest in employee training and development, which can lead to a more skilled and capable local workforce.
  • Education and Awareness:  Communities can benefit from educational programs and resources about ESOPs to help businesses and employees understand the potential advantages of employee ownership.
  • Supportive Ecosystem: Communities can create a supportive ecosystem for ESOPs by providing resources, networking opportunities, and education to help companies successfully transition to employee ownership.

In summary, communities should recognize that ESOPs can be a positive force for local economies and job stability. By fostering an understanding of ESOPs and providing support for businesses interested in adopting this ownership model, communities can strengthen their economic and social fabric.