California State University, Fresno Craig School of Business' Institute for Family Business Discusses Employee Stock Ownership Plans (ESOP)
FRESNO, CA - Many fresh produce companies pride themselves on their foundation as a family farming operation, but how can they ensure that the family legacy lives on long into the future? One way, which I was recently enlightened on, is to implement an Employee Stock Ownership Plan (ESOP). Revealing vital insights into company succession planning, the Craig School of Business at California State University, Fresno’s Institute for Family Business (IFB) hosted a “Family Business Succession Through ESOPs” webinar presented by Steven Deis, Director of ESOP Advisory for Aegis Acquisitions and Legacy member of the IFB Board.
“An ESOP is a controlled process for helping legacy shareholders transition their business financially,” Steven told me as we sat down to discuss the topic. “Many smaller family-owned organizations don't necessarily want to sell to a third party and potentially lose some of the integrity of their legacy. With ESOPs, the beneficiaries are the employees of the company, whereas in a traditional sale of a business, only the current owners are paid for the sale and the individual employees don't see any future wealth creation benefits.”
Steven added that ESOPs are highly applicable to companies in the produce industry—especially those that are vertically integrated—as well as the distribution grocery sector. In the webinar, he noted that in the U.S., there are over $1.4 trillion in assets held in ESOP-owned companies. There are about 6,500 companies nationally that are employee-owned through an ESOP, and California has over 800 of those.
The number of employees that are covered under ESOPs is upwards of 14 million in the United States, according to Steven. With this financial plan, owners are essentially creating a market for the stock of the company and staying private. They are able to manage the company going forward, all while maintaining the integrity of that family legacy into the future.
“Company shareholders elect to do an ESOP to be able to sell equity in the company at a fair market value for the benefit of their families and have the beneficiaries of the stock sold, over time, become the company’s employees. For a company that has, say, 200 employees, rather than the business being held by one family, all of the employees and their families will be able to build equity value into the future,” Steven explained. “For C corporations, a benefit is the ability of shareholders to sell their privately held business equity and possibly defer and or eliminate the capital gains tax associated with the sale. For S corporations, whatever percentage of the company held by the ESOP after the plan is adopted will pay no federal or state income tax.”
That being said, not only will ESOPs save companies money, but they will create deeper incentives for employees to contribute to the business’ long-term goals.
“We’re really trying to empower the employee who has been a part of the extended family by giving them an opportunity to build their own wealth,” added Fernando Parra, Ph.D., CISA, Department of Accountancy Assistant Professor and Director of the Institute for Family Business at California State University, Fresno. “So, as they think of their retirement, they know that every hour they're spending on that family business is also building their wealth for the future.”
While ESOPs serve as a fantastic option for a family business’ financial transition, Steven reiterated that at the end of the day, the best thing you can do for your company is make a plan.
“In a study from the Business Enterprise Institute, about 80 percent of business owners said they believe for their company to properly transition going forward, they need to have a written plan. When asked how many actually had a plan, only 17 percent said yes,” Steven told me. “An ESOP is only one possible option available to family-held businesses. If you haven't planned, talk to your advisors and plan for the future of your company. The most important thing is that if you know your options, you have flexibility.”
For more on this vastly beneficial topic, check out IFB’s webinar above as well as an informational document from Aegis Acquisitions here.
And, as always, keep reading ANUK to stay in the know on the best strategies to bolster your business.