Something caught my eye as I was reading the October 2007 ESOP Report. The President's page discussed the new goal added to the ESOP Association's Strategic Plan:
"Goal: Ownership – the Association will strive to increase broad-based employee ownership through ESOPs in America."
This was something that was fresh on my mind, as I just had spent part of my Friday presenting an introduction to ESOPs to a group of financial advisors (more on this later). I was also preparing to respond to a reader, who asked why, despite the many tax advantages provided by Congress, is there still less than 10,000 ESOPs. The new goal, my presentation on Friday, and the reader's question are all related. As a member of the ESOP Association, an ESOP consultant, and as a US citizen who understands the many benefits that ESOPs provide employees, companies, and society, here are some reasons why the number of ESOPs is not growing at a faster rate.
Many ESOP companies are acquired (with the ESOP being terminated) due to the success of the company, ultimately decreasing the number of ESOP companies
It's hard to be upset when employees of an ESOP company are financially rewarded for the results of their hard work and dedication to their company. We recently discussed an ESOP company acquisition, providing more the 600 participants with an average of more than $600,000 per participant. Acquisition is a by-product of the success of ESOP companies and one that will increase as the number of ESOP companies increases. According to a survey studying the reasons companies terminate their ESOP, acquisition was the most common reason cited for ESOP termination. Most acquired companies reported strong or very strong performance. This is consistent with a recent Employee Ownership Foundation survey and with research on employee ownership and corporate performance that demonstrates how ESOP companies grow faster than their non-ESOP counterparts.
Despite ESOP acquisitions, the number of ESOPs is still increasing
The number of ESOPs increased by 4.6% in 2006 from 9,225 to 9,650. Yes, even considering the ESOP acquisitions discussed above, the number of ESOPs is still increasing. While the number of ESOPs continues to slowly increase, we need to look for more reasons why the ESOP growth rate is so low.
Many companies and professional advisors are unaware of the benefits of ESOPs
The hard work of organizations like the ESOP Association and the National Center for Employee Ownership (NCEO) has increased ESOP awareness. However, I think it is safe to say that ESOPs are not mainstream and we need to continue educating companies and the business community about the benefits of ESOPs.
As I discussed above, I spent Friday sharing the benefits of ESOPs with a group of financial advisors. Why is this important? Many professional advisors (e.g. accountants, attorneys, and financial advisors) are also not familiar with the benefits of ESOPs. Companies are relying on these professional advisors to assist them in determining how to exit the company. If the professionals are not suggesting an ESOP as a legitimate alternative, it is less likely that the company will seriously consider implementing an ESOP.
Many professional advisors without ESOP expertise will lean towards business transition alternatives that allow them to share their expertise and receive compensation for it
Even if professional advisors are aware of the benefits of ESOPs, they may feel that they will be unable to assist their clients with the implementation of an ESOP. Since a major goal of a professional advisor is to share their expertise and receive compensation for it, they are likely to look for other business transition alternatives where they can utilize their expertise. As a result, there are situations where an ESOP might be a great fit but is not seriously considered. I am not questioning the integrity of these very competent professionals; rather, I am identifying a legitimate barrier to increasing the ESOP growth rate.
Many companies are not performing any type of succession planning and other business transition alternatives are being implemented as a result
A recent PricewaterhouseCoopers survey found that 30% of CEOs do not have a plan in place. The number increases to 53% for family-owned businesses. The survey also found that the majority of companies, including many of those that do not have a succession plan, think they will end up selling to a third party. If more business owners took the time to identify their estate and succession planning objectives and considered all of their alternatives, many would find an ESOP to be a great fit for their situation.
With the baby boomers starting to reach retirement age and looking to exit the business, now is the time to increase the ESOP growth rate
This year the first baby boomer reached retirement age. While I could not locate a reliable source document, the statistics I found seem to indicate that more than 5 million companies (UPDATED 3/2/08) will be looking to transition the ownership of their company in the next five to 20 years. If we intend to increase the ESOP growth rate, it is essential that the baby boomers looking for a way to exit the business understand the benefits of ESOPs and seriously consider an ESOP as a viable option.
There is some good news – more companies appear to be implementing ESOPs
Here are three recent examples:
- Five of the 15 Wall Street Journal's Top Small Workplaces have significant employee ownership, including four with ESOPs.
- 22.3% of the Inc. 5000 Index companies state that selling to an ESOP is a Likely Strategy for Transferring Ownership.
- A PricewaterhouseCoopers' "Trendsetter Barometer" survey found that
19% of CEOs of fastest-growing private companies plan to include an ESOP in their exit plan.
Just a Start
This post does not provide all of the answers. In fact, it probably raises more questions than it provides answers. I hope my post sparks a discussion about why the number of ESOPs is not growing at a faster rate and what actions need to be taken to increase the growth rate. Please let me know what you think.