What is an ESOP?

An Employee Stock Ownership Plan (ESOP) is a retirement plan, similar to a 401(k) plan or retirement profit-sharing plan—but with a big difference. The function of an ESOP is to buy company stock and then hold it as a retirement investment for the employees. Assets are held in a trust with a trustee in place.

ESOPs are authorized to borrow money to finance the purchase of stock, and, as a result, employees don’t pay for the stock purchase. The better the company performs, the more the shares are worth, and employees thereby reap more of the rewards from the work they put into the company.

Why should I consider an ESOP?

1. They have tax advantages

The tax savings from selling to an ESOP can often amount to as much as the sale price itself. The tax savings occur at several levels:

• The company: Savings generated by the ability to deduct principal payments from the lender and reduce or eliminate corporate income tax.
• The seller: Savings generated by the ability to defer capital gains taxes.
• The employees: Savings generated by the ability to defer income taxation on the value of the stock they receive.

2. They’re customizable

With an ESOP, you can sell any portion of the company—the ESOP will pay market value for any part.

Let’s say you aren’t ready to retire completely, but you’re getting close and want to start taking a step back from the day-to-day operations. You can sell part of your ownership to the ESOP, which motivates your employees to take on more responsibility and assume an ownership mentality, allowing you to reduce your work hours.

3. You control the transaction

With an ESOP, there is no pushy buyer across the table. You choose when to sell and how much to sell. You can opt to sell the business altogether or sell it in installments over time. You also can determine what your role will be in the business going forward.

4. Your legacy stays intact

You’ve worked hard to build your business, and if you’re like many business owners, you’d like it to live on with its legacy intact. An ESOP means the business will not merge with a larger company that will change it beyond recognition or close its doors for good. It means keeping your hard-working staff still employed and the business rooted in your community and contributing to the local economy.

5. They help improve workplace culture

Research suggests that when employees have a stake in the company, they work harder and smarter. By having part-ownership through an ESOP, employees no longer just punch the clock. Your business becomes their business, too. An ESOP can make an impact on your employees’ lives and can create a shift in the workplace culture.

All benefits of the ESOP model, both financial and cultural, are stronger when implementation of the financial instrument is combined with participatory management and employee engagement.

Why an ESOP could be the smartest move for your business

If you’re exploring succession planning or looking for a way to reward your team while preserving your company’s legacy, an ESOP is a compelling option worth serious consideration. From its unique tax advantages to its ability to boost employee morale and preserve company culture, an ESOP offers flexibility and long-term value that few other exit strategies can match.

Whether you’re ready to fully transition out or simply want to begin the process gradually, an ESOP empowers you to take control of the future—on your terms—while giving your employees a meaningful stake in the business they help build every day.

Want to see if your business is a good fit for an ESOP? Explore nine ESOP readiness factors.