Fast Facts on ESOPs


The first half of 2018 has seen an increase in middle market M&A, particularly with respect to privately held businesses. Many of these business owners are directly interested in employee ownership as an alternative alongside traditional M&A strategies such as a strategic or private equity buyer. Interest in ESOPs seems to be fueled by three key drivers:

The new tax law mitigated the uncertainty about what corporate tax policy would be. It is difficult to discern and compare alternatives without visibility to tax implications. ESOP tax benefits remained unaltered
The tax law did not change personal taxes as dramatically as it altered corporate taxes. ESOPs are an interesting consideration for business owners who see value in the opportunity to permanently defer capital gains taxes
Labor markets are tightening. How does a company successfully attract and retain talent? Employee ownership impacts employee engagement and employee productivity, helping drive long term results

Notwithstanding increased interest in ESOPs, professionals and business owners alike remain confused on many levels with respect to employee ownership. Who better to set the record straight with some fast facts than Mary Josephs? Josephs has worked in and around ESOPs for over 30 years. Mary founded Verit Advisors in 2009 in Chicago and has over three decades of experience in corporate finance for private businesses. Josephs and her team are considered to be the foremost experts in ESOP transactions and middle market strategic alternatives.

Q: What exactly is an ESOP?

Mary: ESOP stands for Employee Stock Ownership Plan. An ESOP is an innovative liquidity tool that provides flexibility for shareholders, tax advantages for the company and business owners as well as an opportunity for employees to grow retirement assets. Employees participate in the economic growth of their employer via company stock held in their retirement accounts.

Q: How many ESOPs are in the U.S.?

Mary: Currently there are almost 7,000 ESOP plans in the U.S. The NCEO (National Center for Employee Ownership) estimates that approximately 28 million employees participate in employee ownership plans. Overall, employees now control about 8% of corporate equity.

Q: How does an ESOP get set up?

Mary: Companies set up a retirement plan trust (think of a 401(k) plan) for employees. Annually, the employer will contribute or allocate company stock directly to the plan. Contributions to the plan are tax-deductible. Employees pay no tax on the contributions. They will pay ordinary income when they retire and withdraw the value from their retirement account, just like a 401(k). I wrote a blog about WinCo Foods where 130 employees have a combined ESOP retirement account of an astounding $100 million. This figure is continuing to grow rapidly, such that in a few years the average wealth of these employees could easily exceed $1 million. That is pretty impressive.

Q: How do the founding shareholders achieve liquidity?

Mary:  Great question.  What is the source of funds?  With a PE sale, the PE firm provides equity, lenders add senior and junior capital, and the business owner generally has an earnout.  With a strategic sale, the buyer uses their stock and/or debt capacity and generally an earnout.  With an ESOP, the employees don’t literally buy the company.  They don’t have the resources.  The company borrows money from lenders and purchases shares from selling shareholders.

Look for a continuation of this conversation in a few days.


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