O P I N I O N
Is an ESOP right for your firm?
D uring economic expansion, owners of well-managed firms see their company’s value grow significantly. The jump in firm value, however, can make the prospects of a fair-market-value internal ownership transition difficult. If your firm has the following characteristics, the more likely an ESOP is a good and viable option for your firm.
Next-generation owners may be unprepared financially for a significant ownership stake. That hurdle often results in an outside sale to fully capture a firm’s value. Over the past few decades, an increasing number of companies including AEC firms, have addressed the financial challenges of ownership transition with an employee stock ownership plan. ESOPs are federally regulated trusts, similar to a 401(k) trust. At Fleis & VandenBrink Engineering, and other AEC firms, ESOPs have proven effective in maintaining ownership “in-house.” We created our ESOP in 2004. It was designed at the time to accumulate assets as our firm grew for the eventual buyout of significant owners. In our case, the ESOP assets come in the form of the match the company makes to the 401(k) plan. The match goes into the ESOP account for each employee and is held in cash, bond, and other investments until stock is available to purchase.
As our growth increased the value of our firm, an internal transition would have been very difficult without an ESOP. ESOPs are generally designed to fit the culture and long-term goals of a specific company. Generally, ESOPs purchase stock from selling owners. The value of the ESOP is then distributed as “ESOP shares” to a large number of employees, who are often referred to as “employee-owners.” Profits of the firm are shared with the ESOP’s employee-owners in the form of distributions to all shareholders including the ESOP. The value of the ESOP grows tax-deferred both from on-going profit distributions and increases in the value of the company. ESOPs, however, lose value if the company share value falls. Is an ESOP right for your company? It depends
See BRIAN RICE, page 12
THE ZWEIG LETTER OCTOBER 26, 2020, ISSUE 1365
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