It seems that small businesses rarely catch a break. Unfortunately, their employees often enjoy fewer perks than those working for larger corporations do. This is primarily because the smaller companies have fewer assets with which to work. Due to the smaller economic cushion, they also have a greater risk. That is why, when a fresh law is put into action for the “little guy,” it is newsworthy.
As with any new law, however, there are those that it benefits, those that are unaffected, and those that it may hurt. That’s why it’s good to stay informed.
What Are ESOPs?
ESOP stands for Employee Stock Ownership Plan. An ESOP allows the owner of a business to shift that ownership to his or her employees. This is often done by way of stocks or “shares.” In some companies, members buy stocks outright.
Other businesses require no upfront cost. The ESOP is part of an “employee benefits package.” It is considered part of his or her pay, and maybe figured as 50/50. This is where the company matches monies contributed by the employee. Often, the shares are held until retirement, and maybe, in fact, the bulk of that employee’s retirement.
Although ESOPs have existed much longer (just in different forms), they became prevalent in the 1980s. According to the National Center for Employee Ownership (NCEO), a few of the largest ESOP companies include the following:
By 2018, the number of ESOPs has been estimated at between 7,000 and 8,900. The number of participants is over 14 million.
What Are the Pros of Employee Stock Ownership Plans?
Reputedly, there are many benefits to participating in ESOPs. For example, they generally have a positive effect on employees. A few of the primary perks include the following:
ESOPs are particularly beneficial in small companies where the primary owner is planning to retire. This allows for a smooth transition of power. As the company succeeds, the employees succeed, and morale rises.
What Are the Cons of ESOPs?
One of the potential problems with an Employee Stock Ownership Plan occurs when the value of the company decreases after an employee buys in. When the business is worth less, each employee’s stock decreases in value. This usually occurs with companies that have inconsistent profits.
An example of this would be the case of Lifetouch Inc., which was a popular photography company. They primarily specialized in school photos. As digital photography techniques became the demand, the company struggled to adjust. Business suffered.
The company stock in ESOP declined by $840-million between 2015 and 2018. Lawsuits were filed against individual members of the Board of Directors. Unfortunately, the company’s ESOP was not protected against such losses. This is one example of what could go wrong with this type of retirement plan.
How Does the New Law Work and Who Does It Benefit?
New York Senator Kirsten Gillibrand introduced the Main Street Employee Ownership Act in May 2018. This ESOP law is the first to focus on employee ownership in the last 20 years. It eases the process for distributing loans for those transferring to an ESOP. However, there are no additional funds being allocated for this process.
Generally, the new ESOP law is thought to primarily benefit small to mid-sized businesses. More specifically, it targets the Small Business Administration (SBA) in two ways. First, it directs them to make small business loans more readily available to cooperatives. A Cooperatives is a style of business organization that is owned and run by the employees. They also share in the profits.
Second, it encourages the SBA to work with country-wide Small Business Development Centers (SBDC). SBDCs provide consultation and training to small businesses that are transitioning to an ESOP.
The ESOP Association’s president, J. Michael Keeling, was reported as saying the following:
“This law will help organizations better understand how to pursue a strategy of shared capitalism—something that our country’s founders agreed was vital to the health of our nation.”
Whether Employee Stock Ownership Plans are the wave of the future is difficult to tell. The new law provides many benefits that make it an attractive proposition. It paves the way for small and mid-sized companies to more easily transfer ownership to employees. Consultation and training are more readily available for those companies wanting to make this transition. It also improves the ability to obtain loans. Overall, it appears things will be brighter for small businesses. As with anything, only time will tell.