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ESOPs: “Another” Way of Doing Business

Last month we attended a packed First Friday Club of Chicago event featuring Mary Sullivan Josephs, Executive Managing Director of Evergreen Private Capital Advisors speaking about Employee Stock Ownership Plans (ESOPs).

Mary recently founded Evergreen as an investment banking firm focused on advising business owners on capital markets and corporate finance solutions, including how ESOPs fit into this mix. Mary has a nationally recognized pedigree in the ESOP advisory field after founding and leading similar practices at ABN AMRO LaSalle and Bank of America Merrill Lynch.

An interesting topic and a well-respected presenter, for sure . . . but why the crowd? To hear Mary certainly, but we’d also suggest that as credit remains tight and alternatives are severely limited for owners of private companies to plan for their exits through direct sales of their companies, other options need to be explored.

Owners could put off retirement in the hope that the economy will quickly rebound and the capital markets unfreeze, but such turnarounds are unlikely to be very rapid.

Others who don’t choose to wait, or cannot wait, are increasingly exploring alternative strategies. As Mary discussed, an approach that’s gathering significant new interest is the ESOP, a defined contribution benefit plan that allows owners to gain liquidity by selling all or part of their company shares on a tax-advantaged basis to their employees.

What does “tax-advantaged” mean? Generally, stock and cash contributions to the ESOP, contributions used to repay a loan the ESOP took out to buy the company stock, and reasonable dividends used to repay an ESOP loan are all tax-deductible. Sellers of stock to an ESOP meeting certain requirements may also get a tax deferral on the sale proceeds reinvested in other qualifying securities. These benefits can be powerful motivators to consider an ESOP.

In addition to the tax and potential liquidity advantages, when communicated and managed effectively, an ESOP is also a great way to reduce workplace tensions (perhaps more important than ever in today’s environment) and increase corporate performance. When it works well, everyone benefits—it’s a “win” for ownership by providing desired liquidity and a “win” for employees as they build both ownership in the business and retirement assets over time.

To complete the picture, Mary also pointed out that ESOP companies generally perform better than their non-ESOP peers. She noted research showing that over the last 10-year period, ESOP companies grew an average of one-third faster than their counterparts. Even during 2009, a year brutal for the bottom lines of most companies, 66% of ESOP companies countered the prevailing winds by growing or at least remaining flat.

In short, establishing an ESOP might be an effective way for business owners to exit their businesses and gain liquidity while also just being plain good for the businesses themselves.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.