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May 01

Employee ownership offers options to owners, workers

Many business owners reaching retirement age look long and hard for a buyer who understands their business model, is knowledgeable about their industry and will continue to operate their business successfully.

Today, more and more business owners are finding those buyers within their own companies.

Employee ownership, often referred to as an Employee Stock Ownership Plan, is an increasingly popular ownership model that, if structured correctly, can benefit both owners and employees.

In a properly constructed ESOP, business owners have ready and willing buyers who will be invested in the long-term growth and health of the company. Business owners also might receive significant tax benefits from converting their business to employee ownership.

Employees, in turn, receive a part ownership of the company, in most cases without having to purchase that ownership stake. Stock typically is given to employees as an incentive, bonus or benefit.

Employee ownership does not make sense in all cases. But mature and successful companies that are valued correctly and well-managed are good candidates for employee ownership.

Employee ownership can foster a superior corporate culture. Employee-owned businesses have the capacity to be more nimble and flexible, and employee-owned businesses often have longer-tenured staff and highly committed employees.

According to a recent Wall Street Journal article, “Businesses with shared ownership plans fared better during the recession than more traditionally structured firms, including fewer layoffs, higher productivity and stronger employee loyalty.”

This corporate culture can differ starkly from a company that is absorbed by a large corporate industry giant. In that buyout scenario, duplicative departments such as marketing and human resources are often consolidated or cut, and often large-scale layoffs occur.

For a business owner who wishes to retire but wants to see the company he or she founded live on as an independent organization, the employee ownership model can be a desirable solution.

Despite these upsides, employees should not take employee ownership as a substitute for diversified retirement planning. Employees should invest in diversified retirement funds separate from their employee ownership.

The baby boomer generation represents a significant segment of business owners.

The Wall Street Journal estimated that 30 percent of U.S. business owners are 55 or older. As those business owners look to retire and pass their businesses on to another owner, a significant portion of them now will be considering their employees as potential owners.

John Solari is the managing partner of J.A. Solari & Partners. He has 25 years of accounting experience and also is a member of the American Institute of Certified Public Accountants and the Nevada Society of Certified Public Accountants.

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