Has the Coronavirus Pandemic Been Kind to ESOPs?
Without a doubt, the COVID-19 pandemic has made an indelible impression on American businesses. Fortunately, with those trying circumstances came clarity, for some. Business owners were forced to redefine their priorities, both for their businesses and for themselves. For many, one of the lessons they learned was how important a good exit strategy can be.
ESOPs – employee stock ownership plans – can be great exit plans for owners of privately-held businesses, especially in times of uncertainty, and here’s why:
ESOPs retain employees at higher rates.
According to a study conducted by Rutgers University, ESOP companies were found to be between three and four times more likely to retain staff during the COVID-19 pandemic. These findings mirrored trends found during the 2008-2010 recession. Although we can only infer why this is true, it’s likely that employees at ESOP companies are happier in their positions and find outside jobs less enticing.
And this makes sense. Because employees will be rewarded when their company succeeds, ESOP companies tend to attract employees who are team players. Owners of ESOP companies will more easily be able to identify a successor to their business when their workforce is comprised of loyal and driven workers.
ESOP companies outperform non-ESOP companies.
The same Rutgers study confirmed that ESOP companies provided better pay, better benefits, and better workplace safety than non-ESOP companies during the pandemic. By retaining workers and avoiding hours reductions, employees were able to retain essential healthcare coverage during the worst parts of the pandemic.
Culture plays a big part in employee retention and company resilience. When businesses award even lower-level employees with company stock, workers have a greater sense of purpose and are more likely to make decisions that benefit the company. This culture builds with each new hire, and business owners can more easily and confidently release the reigns to the next generation when it’s time to make their exit.
ESOP companies are more resilient by design.
When ESOP companies let an employee go, they must pay current market value for that worker’s vested shares of company stock. And when cash reserves are strapped, cashing out employee ESOP accounts will be difficult.
By design, ESOPs make it more difficult for companies to churn through workers.
ESOPs gently force businesses to invest in high-quality employees and find workarounds when revenues drop to avoid layoffs. Companies in this position build resilience that can weather financial storms, which can help valuations remain high, even when markets have taken a dive.
ESOPs are flexible succession plans.
COVID-19 forced business owners to reevaluate their priorities. For some, their priorities shifted away from their business onto other areas of their life. Business owners that hope to transfer their energy away from the business can do so gradually with ESOPs.
To transition out of the company, owners must simply sell their shares back to the ESOP. This transition can be gradual if the owner wants to slowly transition out of the business, or it can be done all at once if they want to make a quick exit. In other words, ESOPs can support almost any transition plan.
ESOPs provide peace of mind.
There are only a handful of ways to sell a business. Selling to an outside party is an option, but what happens after the sale? What will the new owners change? Will existing employees still have jobs? Business owners who want more control over where their company is headed can benefit from ESOPs. ESOPs help ensure the company stays with the individuals who understand the company’s vision and can even help protect the business owner’s legacy.
If you think that an ESOP is potentially the best option for your company, check out this article on next steps to consider. Please reach out with any questions, to our dedicated team at Meaden & Moore.
Hillary is a Senior Manager in Meaden & Moore’s Assurance Services Group and has been with the firm since 2007. She provides public accounting services to a wide variety of clients in various industries including service, manufacturing, communications and employee benefits.