Comments on: Some thoughts on ESOP’s http://stage2.wordpress.com/2008/02/18/some-thoughts-on-esops/ A place for conversations about increasing and harvesting value from private businesses Sat, 24 Oct 2009 13:33:06 +0000 http://wordpress.com/ hourly 1 By: Corey Rosen, National Center for Employee Ownership http://stage2.wordpress.com/2008/02/18/some-thoughts-on-esops/#comment-475 Corey Rosen, National Center for Employee Ownership Tue, 19 Feb 2008 20:16:00 +0000 http://stage2.wordpress.com/?p=127#comment-475 Mr. Patrick's take on ESOPs make a lot of sense, but I would add some caveats. First, the level of ongoing involvement varies considerably from interested observer with a potential exposure if the ESOP does not repay the debt to an active manager. Companies with strong successor management have less need for the former owner to stay actively involved, and many have no desire to do so. Second, ESOPs are a very successful transition strategy. Bankruptcies are very rare, and research at Rutgers, as well as the National Center for Employee Ownership, show that post-sale, ESOPs actually grow faster than would have been expected based on their prior performance relative to competitors and are more likely to stay in business longer. That leads to the third point, which is that is not true that ESOPs often only last seven to ten years. Changes in tax laws make it very, very appealing to stay ESOP long-term by becoming a 100% ESOP company, in which case income tax no longer is paid. ESOP termination rates are now lower than for other benefit plans and ESOP companies are less likely to be sold or go out of business than comparable companies. That is not to say Mr. Patrick's scenario never happens; it just is no longer than common. Details on ESOPs in general and the research in particular can be found on the web site of the National Center for Employee Ownership (my organization) at www.nceo.org Corey Rosen Executive Director National Center for Employee Ownership Mr. Patrick’s take on ESOPs make a lot of sense, but I would add some caveats. First, the level of ongoing involvement varies considerably from interested observer with a potential exposure if the ESOP does not repay the debt to an active manager. Companies with strong successor management have less need for the former owner to stay actively involved, and many have no desire to do so.

Second, ESOPs are a very successful transition strategy. Bankruptcies are very rare, and research at Rutgers, as well as the National Center for Employee Ownership, show that post-sale, ESOPs actually grow faster than would have been expected based on their prior performance relative to competitors and are more likely to stay in business longer.

That leads to the third point, which is that is not true that ESOPs often only last seven to ten years. Changes in tax laws make it very, very appealing to stay ESOP long-term by becoming a 100% ESOP company, in which case income tax no longer is paid. ESOP termination rates are now lower than for other benefit plans and ESOP companies are less likely to be sold or go out of business than comparable companies. That is not to say Mr. Patrick’s scenario never happens; it just is no longer than common.

Details on ESOPs in general and the research in particular can be found on the web site of the National Center for Employee Ownership (my organization) at http://www.nceo.org

Corey Rosen
Executive Director
National Center for Employee Ownership

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