Webinar Separates Facts from Fables on ESOPs

This week, ACEC hosted a webinar on Employee Stock Ownership Plans (ESOPs), featuring a presentation by Bob Massengill of Pilot Hill Advisors LLC.

ESOPs are retirement plans that allow employees to become owners of the companies for which they work by receiving shares of company stock as part of their total compensation. They are typically funded by the company, which contributes shares of its own stock to the plan. Those shares are then allocated to individual employee accounts based on factors like salary or tenure with the company. ESOPs provide employees with a financial stake in the company’s success and can be a way to incentivize, reward, and create HiPo employees.

Massengill delivered an in-depth tutorial on ESOPs: what they are and how they can benefit employees, companies, and sellers alike. But, he cautioned, first things first: a company needs to examine the whys of initiating an ESOP. “The whole concept of ownership transition is not made in a vacuum,” he said. “It’s typically motivated by a desire for an owner to create some liquidity. But among the considerations of the liquidity event really have to do with the company itself.”

And that calls for an honest assessment of a company’s financial and cultural health.

“Questions like financing capacity, the industry and its competitive dynamics, growth of the industry itself, and whether margins are bigger or smaller” all come into play, Massengill said. But that’s just the beginning. There are more personal and human considerations at play, as well. Massengill pointed to a company’s leadership team, its levels of churn and turnover, employee motivation, and productivity as equally crucial to ESOP success.

So…you’ve done your due diligence, weighed the pros and cons, and determined that an ESOP is right for your company. What does success look like?

Massengill shared his definition of a successful transition as one in which “the business owner achieves their primary objectives in the sale process.” [Emphasis his.] “Every business owner has their individual needs and priorities in a transition, so I think it’s important to rank them. What are the priorities? Is it all about price? Terms? Taxation? Continuity? Control? Employees and community? These things can all help guide you in selecting the way to transition the way to ownership once they are prioritized.”

Whatever your business identifies as priorities will inform what strategy is taken in implementing an ESOP. “Match the priorities to the strategy,” Massengill said. “And remember that methods can be tailored to meet your solution.” In any event, he noted, the main takeaway on ESOPs is this: hire an expert who can assist you in the process. “It’s ultimately going to reduce the total cost and increase the likelihood of a successful outcome.”

Click here to view this presentation on-demand.