NFIB

Increase Cash Flow, Improve Productivity with ESOPs
09/ 11/ 2003

by Jeffrey Moses

If you want your employees to work as though they owned the business, you may want to learn more about employee stock ownership plans (ESOPs). Giving employees partial ownership of a business can help rev up production, promote long-term employee commitment and encourage customer awareness - while offering a new avenue for financing.

In addition to the benefits of increasing employee commitment and involvement, there are a number of financial benefits from establishing an ESOP:

Employee purchases of shares through an ESOP can be used by the company for business operations, purchases, R&D, etc.

ESOPs are an easy way to sell shares of a company without going public.

ESOPs can borrow from lenders, using the funds to purchase company shares. This money is then directly channeled to the company when funds are purchased. If the company stock price goes up, both the company and its shareholders benefit.

A company is entitled to lend directly to the ESOP, using either company funds or borrowed funds. The percentage charged for the loan becomes added revenue for the company.

A company can contribute directly to the ESOP, either in cash or shares. These tax-deductible contributions end up channeling cash back into the business.

ESOPs are often used as vehicles for retiring owners to sell the company or a percentage of the company to employees.

There are downsides to establishing an ESOP, including:

The establishment and maintenance of an ESOP may be somewhat time-consuming. Also, legal expenses are usually involved.

As the number of shares held by employees in an ESOP increases, employees as a group may demand more of a voice in company decisions. Many owners may find this situation uncomfortable.

Retiring employees -- or employees who quit and begin work elsewhere-may retain enough shares to have influence in company decisions. (Some employees may want shares, not cash, when leaving the company. This may be the case when the company is generally viewed as being in a growth stage.)

Share dividends may need to be adjusted according to fluctuating levels of profitability, and employees may become disgruntled if dividends fall.

For more information, visit the ESOP Association Web site.

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