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Employee Share Ownership Plans (ESOPs) may offer a lucrative solution for owners interested in generating liquidity, motivating employees and – when the time comes – establishing a means to seamlessly transition out of the business. These employee equity structures which include stock, stock options, phantom stock (shares without voting rights) or a combination thereof effectively enable owners to sell the business to employees.
Businesses have traditionally used ESOPs as incentives to attract and retain talented employees. Though, more recently, owners of private companies have also leveraged them as a flexible strategy to transition out of their businesses.
Such structures are particularly appealing in situations where an owner does not have family members who want to take over the business or there’s a lack of potential outside buyers. Conversely, they are also effective when prospective purchasers only want to purchase business assets and are not interested in business continuity – or if they plan to operate the business in a way that conflicts with the founder’s vision.
ESOPs tend to work well for mid-size companies which have an employee centric culture and rely on significant labour to generate revenue. They offer plenty of flexibility to meet an owner’s financial goals, the company’s business objectives and employee preferences.
An owner may choose to include only a select number of employees in the plan or every staff member in the organization. They may also establish their own exit timeline and retain control of the company until their departure. For example, it’s possible to relinquish as little as 30 percent of the shares and then sell additional shares over time, which generates liquidity while maintaining operating control. This also allows time to develop a management team over a period of years.
There are other benefits to owners as well – including tax advantages, lower sale transaction fees and the reassurance of a company’s continuing stewardship.
The business also often realizes several residual advantages. Because ESOPs are an employee-valued benefit, they tend to attract and retain good team members. Having an equity ownership interest in a company is also a strong motivator that typically improves business performance and productivity – an important advantage in today’s competitive marketplace.
As an entrepreneur, you’ve invested years into building your business and making your vision a reality. If you want full control your eventual transition and ongoing legacy, it might be time to explore the potential of ESOPs.
To learn whether an employee equity structure is right for you, consult a business advisor experienced with Employee Share Ownership Plans. They can help with conducting a feasibility assessment – which looks at the value of the company, its profitability, culture, potential participation, payroll and cash flow – to determine whether the benefits outweigh the costs.
Transition your business on your terms. For more information about your options and what MNP can do for you, contact Shane King, CPA, CA, National Leader, Succession Services, at 604.542.6715 or
Related Topics:ExitSMART™; Employees; Retirement
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