The Next Succession Trend: Employee Stock Ownership Plans (ESOPs)

A significant part of America’s wealth lies with family-owned businesses, with founders/owners reinvesting profits in the business. 

Choosing to form an Employee Stock Ownership Plan, or ESOP, rather than selling the business outright, can help business owners leave a legacy and allow for the continuation of the current corporate strategy along with the current management team and employees. Since significant wealth may have been created through reinvestment, the founder/owner may be driven by a need to diversify wealth. With the greying Baby Boomer generation, ESOPs have become a mainstay and growing trend. In a PricewaterhouseCoopers 2010 study, approximately 10% of business owners chose an ESOP as an ownership transfer vehicle. 

What are ESOPs? 

ESOPs originated in the 1950s but the use of ESOPs were expanded with the passage of the Employee Retirement Income Security Act of 1974 (ERISA). ESOPs have evolved but the purpose of an ESOP has generally remained the same. An ESOP is a qualified retirement plan, like a 401(k) plan, but is designed for investment primarily in the stock of the employer. 

If a company’s common equity is 100% owned by the ESOP and if the operating company is a S Corporation, the company may not be subject to federal (and most state) income taxes. The value created is taxed when distributed to participants when they leave the ESOP, at termination, death, retirement or disability. In addition, ESOPs provide for diversification as the employee/participant approaches retirement. 

Why consider an ESOP?

The National Center for Employee Ownership (NCEO) has conducted studies that repeatedly show that ESOP-owned companies typically outperform their peers on multiple measures when combined with a high-achieving culture. 

Wells Fargo has been providing commercial banking services to ESOP-owned companies since the advent of ERISA. Wells Fargo is a leading lender to ESOP-owned companies; currently serving over 600 ESOP clients. Wells Fargo specializes in supporting the financial needs of Iowa-based ESOP-owned companies at every stage of the business lifecycle through our local Commercial Banking team, while utilizing the experience and counsel of Wells Fargo’s ESOP Advisory Team. 

Casey Cason, Senior Vice President, Iowa Commercial Banking Office, has 30 years of experience financing Iowa-based companies, including ESOP-owned companies. Cason can be reached at casey.a.cason@wellsfargo.com. 

Opinions expressed in this article are general and not intended to provide specific advice, recommendations for any individual or association, or an offer to extend credit. Contact your banker, attorney, accountant, or tax advisor with regard to your individual situation. The author’s opinions do not necessarily reflect those of Wells Fargo Commercial Banking or any other Wells Fargo entity. All Wells Fargo credit decisions are subject to credit approval.