What is an ESOP?
The defense advisory experts at High Stakes Partners know all too well that developing an effective company exit strategy isn’t a once-size-fits-all endeavor. On the contrary, there are many business exit strategy models from which to choose. We are well versed on one that has been practiced to great success in the Intelligence and Defense Contractor industry. This option is the establishment of an employee stock ownership plan, or ESOP for short.
Generally speaking, an employee stock ownership plan is a type of benefit plan in which employees are given an ownership stake in a company. ESOPs are by far the most common form of employee ownership in the United States and can be used for a variety of purposes – exit planning being one of them. One advantage of implementing an ESOP as a company exit strategy is that it makes it possible to sell a business without having to search for, and negotiate with, a buyer. By setting up an employee stock ownership plan, a business owner can immediately create a market for either some or all of their company shares and potentially enjoy the following advantages that ESOPs are known for:
Advantages of ESOPs
A business owner isn’t required to sell all of their stock when creating an ESOP. Selling a minority interest, for example, would enable them to improve their liquidity without having to relinquish control of the company.
Studies consistently show that employees who have an ownership interest in their company behave noticeably differently than those who do not. With more “skin in the game,” workers who participate in an employee stock ownership plan are incentivized to be more productive.
Retention & Recruiting
Employee turnover can be a major hidden cost for just about any company in the A&D industry. Retention rates are, however, generally lower at companies that have ESOPs as employees recognize the many benefits of long-term ESOP participation. An employee stock ownership plan can also be a powerful recruiting tool and make any company that has an ESOP stand out in a competitive human resource marketplace.
A workforce that is incentivized through ESOP participation most often naturally results in higher company share value over time. This can be particularly attractive to anyone who uses an ESOP as a business exit strategy but has elected to retain some ownership interest.
The ESOP Repurchase Obligation
An employee stock ownership plan is fundamentally a retirement vehicle that is funded by the sponsoring company’s own stock. As such, ESOP participants must be able to convert their shares to either cash or cash equivalents when they retire or leave the company. Federal tax law imposes a “repurchase obligation” that requires every company with an ESOP to raise the cash necessary to buy (repurchase) the stock of departing plan participants. The repurchase obligation is a federally mandated liability that must be planned for carefully.
Other Exit Strategies
Establishing an ESOP is, of course, not the only available company exit strategy. At High Stakes Partners, our team has a long history of being highly creative at structuring many different types of business exit strategies for our valued clients. These include, but are not limited to, pursuing a partial exit, selling to a strategic buyer, or selling to a private equity firm. We at High Stakes Partners take tremendous pride in being able to craft highly individualized exit strategies for those who wish to leave their business on their own terms.
Contact High Stakes Partners
ESOPS are very nuanced, and while they can be a great reward for you and your employees, they have their issues too. The best way to get the ball rolling on designing an effective company exit strategy is to contact High Stakes Partners and start a conversion with one of our defense contractor consulting experts. Our team is standing by ready to help you explore your various exit strategy options.
Contact High Stakes Partners today to schedule a consultation.