By Kevin McPhillips and W. Michael Wolfe, CPA, ABV, CVA

The COVID-19 pandemic is approaching its two-year anniversary, and its impacts on the economy was expected in some regards, and very surprising in others. With almost two years of accumulated data, we are able to identify some specific trends. As presumed, hospitality industries (food and beverage, airlines, hotels, etc.) were hit harder than others, though very few businesses saw no effect at all. Interestingly, the data show that employee-owned businesses, in particular employee stock ownership plan (ESOP) businesses, have done significantly better than non-employee-owned companies.

Rutgers University and SSRS surveyed 247 companies that are majority or 100% owned by their employees through an ESOP and 500 companies without employee ownership drawn from an SSRS business panel. The panel is designed to be representative of U.S. companies with 50 or more employees. The study revealed that, among employee-owned firms during the COVID-19 pandemic, employees were retained at significantly higher rates. Even when just comparing businesses deemed “essential” in the two groups, the authors report ESOPs laid off staff at one-fourth the rate of non-ESOP companies. Put another way, for every person who lost a job at an ESOP company, four people lost their jobs at other companies.

A study conducted by John Zogby Strategies provides evidence that employees in ESOPs suffered fewer financial setbacks compared with a sample of employees at companies without ESOPs. This study reports on data from 600 full-time mid- and lower-level employees at privately held companies: 200 worked at Employee-Owned S Corporations of America (ESCA) companies and 400 from non-ESOP companies. The margin of error for the sample of 200 ESCA employees is +/- 6.9 percentage points. The margin of error for the sample of 400 nationwide full-time non-ESOP employed adults is +/- 4.9 percentage points.

Highlights include the following:

• Just under a third (32.7%) of non-ESOP employees expressed that the pandemic had a negative impact on household finances/savings compared with 12% of ESOP employee respondents who expressed the same.
• Nearly one in three (30%) non-ESOP employees reported having lost a job or had their job downsized, but only 4.5% of ESOP employees reported the same.

There are many forms of employee ownership, but ESOPs are becoming increasingly popular as businesses owners age and look for succession plans. There are only so many ways a business owner can sell his or her ownership in the business when ready to exit. Selling to an ESOP has the benefit of taking care of all those employees who have helped build the business over the years and to whom the business owner wants to give a secure future. Other forms of sale can put employee jobs at risk, depending on what vision the buyer has for the company. If you want your legacy to reflect the appreciation you have for the employees who helped you build the business, an ESOP is one of the best ways to achieve this.

ESOPs are a part of the Employee Retirement Income Security Act, and, for Pennsylvania subchapter S corporations, work as follows:

A business owner can sell some or all of his/her shares (20%, 40%, 100%) to the employees. The employees pay nothing, not a cent. Rather, the business takes on a loan to pay the owner(s). The federal government and the state of Pennsylvania agree to make the company’s profits tax free for that portion owned by the employees. The tax savings serve to pay off the loan. After the loan is paid, the tax savings remain for as long as it is employee-owned. The owners get full fair market value for some or all of their shares, the employees now have real beneficial ownership of the company, and the business becomes more profitable (as much as 8% to 12% year over year). There is no other form of sale that will eliminate so much (potentially all) income tax for a company after an ESOP is formed.

Yet very few people know about this remarkable program. The Pennsylvania Center for Employee Ownership is a nonprofit volunteer organization that helps interested businesses learn how to transform their own company.

Kevin McPhillips is the executive director of the Pennsylvania Center for Employee Ownership in Havertown, Pa., a Pennsylvania volunteer 501(c)(3) nonprofit focused on raising awareness about the benefits of employee ownership. He can be reached at kevin@paceo.org.

W. Michael Wolfe, CPA, ABV, CVA, is a valuation/transaction advisory services partner at Trout CPA in Lancaster, Pa. He can be reached at mwolfe@troutcpa.com.

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