Shareholders can sell their business to an Employee Stock Ownership Plan (ESOP) in order to achieve a number of objectives, including gaining liquidity, transitioning ownership to the next generation of leadership and rewarding the people who helped make the firm successful. As an ESOP is a qualified retirement plan, wealth creation for employees is one of the greatest benefits of an ESOP.
When structured correctly, ESOPs can work successfully for the selling shareholders, employee participants, and the company. The shareholders of a company are able to sell company stock without placing the jobs of their employees at risk, as may occur when selling to a third party. Employees earn generous retirement benefits if the company performs well through their holdings of the company’s stock, which is repurchased from their accounts, generally upon retirement. This provides a meaningful incentive for employees to work harder so their company and their retirement balances do well. According to recent data, this dedication and commitment is paying off.
“Participants in S-Corp ESOPs saw their total returns grow by 11.5 percent.”
ESOPs performing well
New data released from Ernst & Young illustrates private employee stock ownership retirement plans, commonly referred to as “S-Corp ESOPs”, outperformed the S&P 500 Total Returns Index by 62 percent in terms of total return per participant. In addition, net assets increased more than 300 percent and distributions to participants totaled nearly $30 billion between the years 2002 and 2012.
The study discovered participants in S-Corp ESOPs saw their total returns grow by 11.5 percent compound annual growth rate, while the S&P 500 Total Returns Index only experienced a 7.1 percent growth rate during the same time span.
As the numbers indicate, S-Corp ESOPs can be very successful and provide tremendous retirement benefits for employees. For the right company, ESOPs can align extremely well with the best interests of the employees, company, and selling shareholder.