Ex nihilo, out of nothing. When you began your business, it may have been an idea you brought to life with your own ingenuity and hard work. But now, if your company has grown at all, it also bears the image of other creators. Key employees have contributed ideas, talent, a history of hard work and a pool of knowledge that is significant to the value of your company.
Economists Thomas Malthus and David Ricardo called this “surplus value” that owners retain at the expense of employees, but you want to give credit where it’s due, because: Your people are your company. For many company owners, an employee stock ownership plan (ESOP) is a way to reward faithful employees, value their contributions and create a win/win exit.
An ESOP does just what it says: it’s a way for a company to provide employees with stock ownership. The firm allocates shares to employees which vest over time. Employees receive an incentive to benefit the firm with their work because they participate in the economic growth of their company through company stock held in a retirement account.
Imagine if all of your employees suddenly became owners of your company and acted like it. Imagine if they thought about the bottom line as they made their contributions to work each day, as they made decisions on what to prioritize, what to spend money on and how to treat customers.
One of the greatest benefits of an ESOP is that it can keep your employees focused on your business’s performance. Stock ownership encourages employees to do what is best for shareholders, since they themselves are shareholders. Results may include improved productivity, profitability and overall company performance.
An ESOP is a creative liquidity strategy that provides flexibility for shareholders, tax advantages for the company and business owners as well as an opportunity for employees to grow their retirement savings. With an ESOP, the employees don’t immediately buy the company; they don’t have the resources. The company normally borrows money from lenders and purchases shares from selling shareholders.