There are a lot of things that we just know. We have either simply heard them so many times that we accept them or they seem so logical that we see no reason to doubt their validity. Four things that we "know" from history are:
Business owners planning for their eventual exit from the business often tend to know a lot about Employee Stock Ownership Plans (ESOPs). This knowledge may prevent them from seriously considering the plans as part of their succession strategy. Being able to debunk some of these issues positions you as having expertise with ESOPs and can create opportunities to generate asset and insurance needs.
What we "know" | The truth |
| Napoleon Bonaparte was short. | Actually, he was 5'7," which was average for men at the time. |
| Albert Einstein failed math in school. | Einstein excelled at both math and science in school. |
| Thomas Edison invented the light bulb. | Although he does get credit for the first practical light bulb, others had actually invented it prior to that time. |
| A doctor created a monster named Frankenstein. | In Mary Shelley's novel, "Frankenstein," a medical student, creates the monster which is unnamed. |
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Let's take a look at what business owners know about ESOPs and the reality.
What we "know" | The truth |
| The owner will lose control of the company. | An ESOP doesn't change the company's corporate governance. The board of directors appoints the ESOP trustee which is the legal shareholder and votes the shares on behalf of the retirement plan participants. The board and management remain in control of the company, even when the ESOP owns a majority of the company. |
| The owner will have to sell the entire company. | An ESOP allows the owner to decide how much of the business to sell and the timeline for ownership transition. |
| The company will have to disclose detailed financial information to employees. | The ESOP is a qualified retirement plan and must provide participants an annual statement illustrating the value and number of shares held for their benefit. There are no requirements that the company share any other financial information with them (although some may elect to do so). |
| ESOP transaction costs are large compared to other alternatives. | ESOP transaction costs are similar to the costs incurred selling to a third party. Regardless of how a business owner transitions ownership, accountants, attorneys and valuation companies are typically engaged. |
| ESOPs are difficult for employees to understand and appreciate. | Because the majority of the plan's assets are company stock, it may actually be easier to understand an ESOP than other retirement plans. Many ESOPs use a comprehensive communication plan to highlight the plan and offer education about how the employees can enhance company performance and value. |
| The owner will not get full value for the company if it is sold to an ESOP. | ESOP transactions must be executed at a price no greater than fair market value as determined by an independent appraiser. There is no requirement that would lead an owner to sell for less than fair market value. |
| Only large companies can put an ESOP in place. | Companies of all sizes can benefit from an ESOP. Organizations as small as 30 employees or less have successfully implemented an ESOP. The key factors to determining whether a company is a good ESOP candidate are:
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Employee stock ownership plans can be a great way for you to help your clients and grow your practice. Sometimes we just have to get past what we know.
Company stock is not a pooled investment. Stock may experience greater volatility and should not be directly compared to investment options that have a more diversified investment mix. It is not intended to serve as a complete investment program by itself.
Insurance products and plan administrative services are provided by Principal Life Insurance Company a member of the Principal Financial Group (The Principal), Des Moines, IA 50392.
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