The Benefit of ESOP

I recently had the opportunity to present a case study on Larson Design Group’s Employee Stock Ownership Plan (ESOP) experience to a group of interested people at the Lancaster Chamber of Commerce and Industry’s Employee Ownership Forum. Our ESOP was formed in 2001 to assist in the transition of ownership from our first to second generation. This ownership model provided an excellent means of connecting all LDG employees to the mission, vision, values, and growth strategy that LDG has maintained during its entire history of local ownership, from 1993 to this day. The ESOP also gives all LDG employees the opportunity to benefit from the increased value of our company stock as the firm continues to grow and achieve top quartile industry performance results.

Enabled by the federal ERISA law of 1974, ESOPs are a great option for transitioning ownership of a privately held company from one generation to another, as was the approach taken by LDG back in 2001. ESOPs are also great tools for both publicly and privately held companies to engage and motivate employees to focus on growth and performance improvement. When revenues and profits increase, the value of a company’s stock typically increases, which raises the value of stock shares held in each employee’s ESOP account. So if all employees in an ESOP company work together, they all benefit from increased share value. This “I win, you win, we all win” trait of ESOP companies has many beneficial effects on company performance in comparison to non-ESOP companies in similar industries.

According to National Center for Employee Ownership statistics, ESOP companies on average experience 2.3% higher growth rates, 10.3% higher profitability, and employees have more than three times the retirement assets in comparison to employees at similar non-ESOP companies. Over time, these statistics yield significant benefits for shareholders and help to explain why ESOPs are so beneficial in motivating employee owners. If developed and managed properly, an ESOP can create an “accountable owner” culture among employees, and they will want to succeed because it benefits them as well as the company.

An ESOP provides excellent benefits from a tax standpoint as well. If structured appropriately, an ESOP can reduce immediate tax consequences for departing shareholders in ownership transitions, they reduce the corporate tax liability of companies that operate under subchapter S-Corporation structures, and they make an excellent tax-deferred retirement plan for employees to supplement 401(k) plans that are present in most private companies.

I’ve had a chance in this blog to touch on just a few of the benefits of ESOPs. There are many more. If I have piqued your interest, I’d be happy to share more info in comments on this blog or a personal conversation. If you are considering an ESOP, already have one, or just want to learn more, please feel free to contact me.

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