Join ESOP Plus in Denver with NCEO

2015 Employee Ownership Conference in Denver This Spring

The growing community of employee-owned companies will gather April 20-23, 2015 in downtown Denver for the 2015 Employee Ownership Conference. Hosted by the National Center for Employee Ownership (NCEO), more than 1,200 attendees representing businesses from across the U.S. will learn about emerging trends, legal issues, best management practices, and much more. The events will all be held at the Sheraton Downtown Denver conference hotel.

The United States presently has close to 9,000 employee ownership companies. These businesses employ over 14 million people and outperform other business in job creation and productivity, while more broadly sharing the wealth they create. Driven by the demographic wave of baby boomers entering retirement age, the number of businesses for sale is sharply increasing, and many of those owners are choosing to exit their businesses by selling to employees.

ESOP Plus®: Schatz Brown Glassman Kossow LLP is proud to be sponsoring this conference. We will be actively involved with exhibiting, speaking, and sponsoring the book provided to each participant, which will provide insight into current trends in employee ownership. Our partner Peter Jones will be presenting on Tuesday, April 21, 2015 at 10:30 a.m. on “ESOP Committee Roles: Are WE responsible for that?”

As a special sponsor benefit, we are happy to be able to offer our clients and contacts the following discount codes for registration.  Simply enter the following discount codes on the registration page, when asked and you will receive $35 discount per attendee for the main conference, and a $20 discount per attendee for any preconference session.

Main Conference: Save35

Any of 3 preconference sessions: Save20

For more information and to register, go to /www.nceo.org/conference or call the NCEO at 510-208-1300. We urge interested companies to register soon, as this conference often sells out in advance!

Highlights of the conference include:

  • Morning Keynote Address on Wednesday, April 22, Mary W. Tilley from W.L. Gore & Associates speaks about Cultural Practices That Drive Business Results: What Ownership Inspires
  • Over 90 sessions in five learning tracks: employee stock ownership plan (ESOP) basics, ESOPs beyond the basics, compensation and benefits, communications and culture, and leadership and governance.
  • On the afternoon of Monday, April 20, three half day preconference sessions, Compensation Issues for Privately Held Companies, Building a Culture of Ownership in an Employee-Owned Company and Corporate Governance at ESOP Companies.
  • The Tuesday April 21 Welcome Luncheon and Opening General Session with the address, the State of Employee Ownership, by executive director Loren Rodgers.
  • Numerous opportunities to network, to discuss, participate, learn, and share
  • Exhibit hall with a wide representation of firms doing business in the employee ownership and equity compensation field

What Past Participants Say About This Conference:

“Networking opportunities were fantastic, especially the industry roundtables. And the energy of the group was palpable, positive, and infectious.”

“I was a first-time attendee to this conference and loved it. I hope to talk my company into sending me to this every year, no matter where it is located”

“For me, this was the most useful conference ever since I was able to find a breakout in each time slot that dealing with matters I face each business day.”

“I was amazed at how well run, informative, and professional this conference was. The quality of most of the speakers was so high that the whole event just flew by.”

The NCEO (www.nceo.org) is a nonprofit research and education organization established in 1981. It is widely recognized as the main source for accurate, unbiased information on ESOPs, other forms of equity compensation, and ownership culture. Learn more about employee ownership from the NCEO (www.nceo.org) or our informational Web site www.esopinfo.org.

 

ESOPs Take the Oxymoron Out of Inclusive Capitalism

ESOPs Take the Oxymoron Out of “Inclusive Capitalism”

 

In a January 20, 2015, op-Ed piece in the New York Times, “Can Capitalists Save Capitalism”, Thomas Edsall reports that key Democrats have reached agreement on a set of policies known as “inclusive capitalism” that would reduce wealth and income inequality.  According to Edsall the inclusive capitalism concept has expanded worldwide over the past 13 years to apply to those at the bottom and the middle of the ladder in developed nations, including the United States. Edsall reports that Republican leaders in Congress have already “stiff-armed” these proposals.

 

On May 27, 2014, more than 220 leaders met for the “Conference of Inclusive Capitalism” in London to discuss the future of capitalism and “how we can act to make our economic system more equitable, more sustainable and more inclusive.” Carol Hanish, writing in CounterPunch, a magazine that touts itself as “America’s Best Political Newsletter”, dismisses “inclusive capitalism” as an oxymoron and posits that in economics our thoughts and actions must be constrained within a discussion of “capitalism” versus “communism”.

 

Is there a way to bring these shrill views together?  Is there a vehicle to help mitigate the media-fanned tension between the evil, exploitive others and the virtuous rest of us?

 

There is such a vehicle in the United States, and it is already a vibrant part of federal law.  It has continuing broad-based, bi-partisan support.  It helps business owners, and it rewards employees by turning them into capitalists. It distributes capitalism into smaller employee teams who can compete effectively in the global marketplace.  It supports the fundamental American idea that reward follows hard work and strategic collaboration.

 

The vehicle is the Employee Stock Ownership Plan (the ”ESOP”).  It is a special kind of qualified retirement plan that can borrow money to buy businesses from owners who wish to sell. The ESOP buys the seller’s business for the benefit of all the employees of the business.  These employees in turn reap the rewards of their success (and, much less often, suffer from their failures), as did the prior owner.  In most cases, other common retirement plans, like 401(k) plans, continue to exist in the employee owned business along side the ESOP so that the risk to employees of business failure is minimized.

 

ESOPs have been around for many years.  Since 1974 they have been defined and regulated by the Internal Revenue Service and by the US Department of Labor for the protection of the employee owners.  They offer tax benefits to selling owners as well as tax benefits to employee owners. Because ESOPs benefit both owners and ordinary employees, both US political parties have consistently supported them.

 

Over 50% of the US workforce works for small businesses with fewer than 500 employees.  About 15 million of these employees already work for the approximately 9000 companies that have ESOPs or ESOP-like profit sharing plans.  Employees of ESOP companies regularly accumulate and ultimately receive substantial cash benefits from their ownership in ESOP companies.

 

In the United States, it is not necessary to create dozens of new, convoluted tax and fiscal policies to produce inclusive capitalism.  It is not necessary to create more bureaucratic structures to deliver fiscal benefits or to administer new taxes.  It is not necessary to increase the level of sharp partisan disagreement about policy.  All we need to do is increase the use of a well-defined tool that we have had in place for over 40 years.

 

ESOPs are the ideal synthesis between traditional capitalism and inclusive capitalism.  They represent capitalism.  They do not represent communism or socialism. They encourage employee owners to pool their front line knowledge competitively in the global economy.  They spread the wealth among those who compete successfully, and they have the potential to reinvigorate global American business with a tool already at hand.

 

Is an ESOP Right for Your Business?

We are frequently asked whether an ESOP is right for a particular business. As a business owner reaches retirement age, the question of how to protect his legacy while exiting the business comes to the fore of his or her mind. On the one hand, an owner can sell his or her business outright. But this involves the owner immediately giving away all that they have worked for and built. An ESOP may provide a better option. In an article featured in Forbes magazine, contributor Stuart Robertson suggested five questions that will assist business owners in deciding whether an employee stock ownership plan (ESOP) is right for their business.

  1. Does the company make enough money? For Robertson, an ESOP makes sense only if a company has at least 20 employees and more than $5 million in annual sales. This is because the set up costs and annual costs of running the plan can cost thousands of dollars. While the 20 employee / $5 million in sales figures are not absolute, Robinson uses these numbers as a way of highlighting the need to conduct research and/or studies before setting up an ESOP to ensure such a plan is financially feasible for the company. We suggest that net profit in the range of $1 million is a better barometer.

  2. Does the owner or owners want to retain some measure of control? In a straight sale of a business, the owner or owners sell their ownership interests outright and thus lose all ownership rights in one instant. But an ESOP can allow an owner’s interests to be purchased in stages over time. For an owner who has worked for years to build the business, this gradual transition allows the owner to ease into retirement. Indeed, in most ESOP transactions, the owners remain board members and executives for some time after the close of the transaction.

  3. Is the owner in a hurry to sell? If the business is profitable and the owner is in no hurry to sell (i.e., the owner has some money in reserves and is comfortable with the employees buying him or her out over a period of time), an ESOP may make sense. Conversely, if the owner is strapped for cash and requires immediate and full liquidity, an ESOP may not be a good choice.

  4. Is the owner concerned about his or her tax liability? An ESOP can provide significant tax benefits, including deductibility of contributions and the deferral of capital gain on a sale of C corporation stock if proceeds are reinvested in stock of U.S. operating companies.

  5. Does the owner believe in his or her employees? Companies with ESOPs generally have higher productivity levels and larger profits because employees are motivated to help the business succeed. Owners who do not trust their employees to work for the betterment of the company may not see the benefits of setting up an ESOP.

Contact a Knowledgeable ESOP Attorney

Whether you set up an ESOP for your business is a decision that can have a dramatic impact on the future of your business. Do not make this decision without consulting with us at ESOP Plus. We can help you evaluate whether an ESOP makes sense for your situation and, if it is, we can assist you in setting the plan up. Contact ESOP Plus today at (888)-840-6830.

How Do I Set Up an ESOP?

40 years ago, Employee Stock Ownership Plans (ESOP) were virtually unheard of 4. Today there are approximately 7,000 vibrant companies that have ESOPs in place, benefiting over 13 million employees. While there are many reasons why a private company may set up an ESOP, the decision process to set up an ESOP and actually setting up such a plan usually includes the same or similar steps:

Step One: Determine if the Owners and Senior Management of the Company are Agreeable

It may go without saying, but an ESOP must have the agreement and support of the business owners. The business owners must be interested in liquidity and diversification of their wealth, and importantly, interested in transitioning ownership of the company to valued employees. It is also helpful if senior management (the valued employees) supports the process.

Step Two: A Feasibility Study

If owners and management are on board, a feasibility study should be performed. The size and complexity of the business will dictate how formal of a study is necessary, but at a minimum, a ballpark estimate of value should be determined so that the owners can decide if they want to sell. Then, cash flow, payroll, and the potential repurchase obligation of the company should be examined to determine if the company can afford to fund the purchase from the current owners and meet the limitations and requirements of the Internal Revenue Code.

Step Three: Design the Plan and Structure the Transaction

Assuming that the plan is feasible and supported by the owners and management, the next step should be to design the Plan and transaction—i.e. the sale of company stock to the ESOP. A knowledgeable ESOP attorney will draft a plan that allocates the benefit to employees in a manner acceptable to management and the IRS. Further, the knowledgeable ESOP attorney will advise as to compliance with fiduciary standards in ESOP transactions. The transaction may include bank financing, seller financing, or a combination of the two. Your ESOP attorney will assist in preparing any and all documents to ensure a smooth transaction that meets the goals of the parties and the most recent regulatory guidance. .

Step Four: Trustee Engaged and Transaction Closed

To complete any transaction, the company must engage a trustee who will act solely in the interests of the beneficiaries of the ESOP. While an employee of the company may act as trustee, it is a best practice to engage an “outside” trustee. Once the ESOP has been adopted and the transaction has occurred, the business may return to an “internal” (employee) trustee. The trustee must obtain the guidance of an independent appraiser. That appraiser will determine whether the price to be paid by the ESOP is no more than fair market value and the transaction is fair to the participants from a financial point of view.

Step Five: Carrying Out the Plan

Post-transaction activities include submitting the ESOP plan to the IRS for a determination of qualification. Your ESOP attorney will assist in this process. And like other defined contribution plans (i.e. 401(k)s), annual 5500 reporting must be completed for the ESOP. If the stock sold to the ESOP is not publicly traded, that stock must be valued on an annual basis. Not to be lost in the shuffle, employees must be educated about the ESOP and encouraged to get involved.

Contact ESOP Plus

The process of creating and carrying out an ESOP does not need to be intimidating. We can help you understand ESOPs and help you evaluate whether an ESOP makes sense for your situation. We can also guide you through the setup process and ensure your plan meets with IRS approval. Contact the ESOP Plus team today at (888) 840-6830.

ESOP vs. 401(k): Which Type of Plan Makes the Better Retirement Plan?

Our friends at the National Center for Employee Ownership (NCEO) recently responded to the query: Are ESOPs too risky of an investment to be a good retirement option for employees as compared to a more traditional retirement plan (like a 401(k))? Critics claim that ESOPs present too much risk. Not only are retirement assets concentrated in the company’s stock, but the employees depend on the same company for their regular paycheck and their retirement. Despite these concerns, there are significant features of ESOPs that make them a rational choice for retirement plans.

Benefits of an ESOP over a 401(k)

Features of ESOPs and the companies that offer these plans highlighted by the NCEO include:

  • Statistics show that ESOP account balances tend to be 2.2 times as large as 401(k) balances. ESOP accounts tend to be larger, because ESOP companies transfer on average 6% to 8% of pay per year into the plan. 401(k) accounts tend to be smaller, because a non-ESOP company generally transfer about 4% of pay per year into the 401(k), and this only goes to those employees who defer into the plan. A larger account balance may not reduce risk – both ESOPs and 401(k)s have some measure of risk – but a larger balance leaves more room for a decrease in value.

  • ESOP plans encompass all employees who meet the minimum service rules regardless of how much income the employee defers into the plan. A 401(k), by contrast, is only a benefit for the employees who defer income into this plan (which, according to some estimates, is only near 50%).

  • When the economy takes a downturn, both ESOP account balances and 401(k) account balances can take a downturn. But the effects of this downturn can impact employees differently. For example, employees may have a difficult time accepting a reduction in their 401(k) balances because such balances are comprised (at least in part) of their elective deferrals. But because an ESOP account balance comes from contributions of the company alone (in most cases), the loss is less personal.

  • Statistics show that between 1991 and 2010 ESOPs had a higher rate of return on average than 401(k) plans (9.1% rate of return for ESOPs compared to a 7.8% rate of return for 401(k) plans).

Contact Next Generation ESOP Plus with Questions

While there are situations and circumstances in which an ESOP might not make sense, these plans can offer substantial benefits. Contact us at ESOP Plus at (888) 840-6830 to discuss all your ESOP-related questions and concerns. We can help you evaluate whether an ESOP is right for you and help you set up an ESOP for your business.