Many entrepreneurs view their venture as something more than just a business. The venture is something that they dreamed about, built from nothing more than just an idea, and have a hard time picturing anyone running it in any way beyond how they think it should be run. This thought process has blinded these entrepreneurs from seeing the inevitable, they need an exit plan. Unfortunately, until this assignment, I was one of these individuals that never gave much thought about how or when I would want to step down from a proposed venture.
As I looked at the many ways that a business owner can step down from a company and implement an exit plan, the one that stood out to me the best was the Employee Stock Ownership Plan (ESOP). The ESOP is a “retirement plan that allows employees to own a share of the business they work for” (Watkins, 2020). An ESOP is like profit-sharing programs except instead of paying employees dividends at the end of the year, an employee can either earn or buy a share of the company. These shares in the company are held by the employees until the time of retirement or leaving the company.
After a feasibility study and valuation of the business, an ESOP attorney can be hired to draft the plan to be submitted to the Internal Revenue Service (IRS). After the plan is accepted by the IRS, an ESOP can be set up by starting a trust fund (NCEO, 2016). Employees at this point can own shares of the company.
The advantages of an ESOP for the company is that the company has a way to obtain extra cash to upgrade equipment or expand. The advantages of an ESOP for the owner is that the owner can take out money to fund retirement while transferring ownership to the employees that have helped build the company into what it is at that point (ESOP, 2020). The advantages for the employees are that they will not be taxed for contributions to the ESOP plan.
The disadvantages of an ESOP are that it is not easy, fast, or cheap. The company needs to have enough cash available to buy back stock from employees that retire or leave. And lastly when the company is good well in the market ESOP is a strong investment, but if the company is doing poorly the threat of losing a job is compounded by possibly losing their investment.
An ESOP is a sound exit plan when the company is sound. By having shares of the company, employees are part owners of the company. By being part owners of the company, studies show that employees are more invested in the company and work harder to see the goals of the company met. Work satisfaction is higher in employees that are part owners. Ultimately, the owner knows that when the time comes to leave that the business is being run by people that want to see success even though the owner is no longer there.
ESOP. (2020). ESOP (Employee Stock Ownership Plan) Facts. ESOP.ORG. https://www.esop.org/
NCEO. (2016). Steps to Setting Up an ESOP | NCEO. Nceo.Org. https://www.nceo.org/articles/setting-up-esop
Watkins, D. (2020). What Is an ESOP Plan? Chron.Com. https://smallbusiness.chron.com/esop-plan-888.html