Accounting & Auditing

By Mario O. Vicari, CPA, and Kevin McPhillips

Clients value the insights of their CPAs, and often turn to them when it comes to important decisions, especially something as important as a strategy to transition out of their business. Many strategies can be formulated, but an often-overlooked option is the employee stock ownership plan (ESOP). This blog highlights ESOP benefits so CPAs can be more conversant on this transfer option.

ESOPs were created by Congress in 1974 to provide retirement benefits in the form of beneficial ownership of stock shares (held in a trust) in the company in which the employee works. Employees do not pay for the shares. Rather, the business takes on a loan (to pay the owner) and the federal government and state of Pennsylvania provide a tax abatement to pay down the loan. Very few know about this remarkable program.

Individual Tax Efficiency

If a company is a C corporation when shares are sold to an ESOP, as long as the ESOP owns at least 30% the selling shareholder can defer the federal capital gains tax on the transaction by rolling over the proceeds into a type of security called a qualified replacement property (QRP) after the sale. Pennsylvania is considering a bill to allow the same benefit for state income tax purposes.

Corporate Tax Efficiency

If an S corporation has shares owned by an ESOP, there is no federal or Pennsylvania income tax due on the ESOP’s share of the income. An ESOP is a qualified employee benefit plan under the Employee Retirement Income Security Act (ERISA), which makes it a tax-exempt entity. For C corporations, contributions and preferred stock dividends paid to the ESOP are tax deductible by the company and are the source of funds to repay debt used to finance the ESOP transaction. This has the effect of giving the company the ability to repay principal on debt with pretax dollars, which is very tax efficient.

Ability to Generate Liquidity while Maintaining Control

Owners selling to an ESOP do not need to sell 100% of their stock; they can sell a minority interest. This allows the owner to take some money off the table while still maintaining operational control of their company. Selling a minority stake also allows an owner to “test drive” the ESOP before they commit to selling 100% of their stock. Many owners choose to sell their stock to an ESOP over a period of years to spread out the financial impact. With most other transition options, the transfer of ownership in the company also means a transfer of the leadership. With an ESOP, an owner can sell their shares but continue in their role at the company after the sale. Selling to an ESOP gives the owner flexibility to exit from day-to-day work at their own pace and on their own timeline.

Selling and Still Being an Owner

If the company is an S corporation, the shareholders who sell their stock to an ESOP and continue to work at the company can be allocated ownership shares within the ESOP (within certain limitations), with the rest of the employee owners.

Rewarding Employees

Taking care of long-time, loyal employees is a goal for many owners considering an exit strategy. An ESOP offers a way to reward valued team members by providing them with a long-term ownership incentive plan for their retirement as well as more job stability since no third-party buyer is involved.

Community/Job Creation

ESOP companies tend to remain in the communities in which their businesses were built. Companies sold to third- parties often move, resulting in jobs lost in the community. ESOPs keep people employed in the communities in which they live.

Gradual Leadership Succession

Since a sale to an ESOP does not require an automatic change in management and leadership, companies can continue to work on their succession plan before and after the ESOP transaction. This flexibility allows many companies to complete a transaction while continuing to work on management succession.

Better Performance

When employees are given ownership, it positively impacts their behavior because they now have “skin in the game.” Generally, an ESOP company’s performance increases over time because its employees are more engaged and productive. Knowing that they will share in the benefits of the company’s increased performance is a powerful motivational tool. When selling minority tranches as part of a planned succession strategy, the seller can realize increasingly higher share prices as they sell.

Improved Recruitment and Retention

It is expensive to recruit and retain people, and turnover is one of the biggest hidden costs for many companies. ESOPs typically have better retention rates because of the long-term benefits associated with the ESOP. An ESOP is also an attractive recruiting tool by offering a prospective employee a benefit that is not available in many other companies.

ESOP companies often have uniquely positive cultures due to employee ownership. These differences become visible to the market and can serve as a point of differentiation in the way the company interacts with its customers and suppliers. Additionally, customer and supplier relationships with ESOP companies are often viewed as more stable because the business is unlikely to be sold to a third-party.

Over time, this can become a competitive advantage.

Mario O. Vicari, CPA, is a director, audit and accounting, at Kreischer Miller in Horsham, Pa., and head of the firm’s ESOP practice. He can be reached at mvicari@kmco.com.

Kevin McPhillips is executive director of the Pennsylvania Center for Employee Ownership in Havertown, Pa. He can be reached at kevin@paceo.org.

Sign up for weekly professional and technical updates from PICPA's blogs, podcasts, and discussion board topics by completing this form.

Ethics

By Mario O. Vicari, CPA, and Kevin McPhillips

Clients value the insights of their CPAs, and often turn to them when it comes to important decisions, especially something as important as a strategy to transition out of their business. Many strategies can be formulated, but an often-overlooked option is the employee stock ownership plan (ESOP). This blog highlights ESOP benefits so CPAs can be more conversant on this transfer option.

ESOPs were created by Congress in 1974 to provide retirement benefits in the form of beneficial ownership of stock shares (held in a trust) in the company in which the employee works. Employees do not pay for the shares. Rather, the business takes on a loan (to pay the owner) and the federal government and state of Pennsylvania provide a tax abatement to pay down the loan. Very few know about this remarkable program.

Individual Tax Efficiency

If a company is a C corporation when shares are sold to an ESOP, as long as the ESOP owns at least 30% the selling shareholder can defer the federal capital gains tax on the transaction by rolling over the proceeds into a type of security called a qualified replacement property (QRP) after the sale. Pennsylvania is considering a bill to allow the same benefit for state income tax purposes.

Corporate Tax Efficiency

If an S corporation has shares owned by an ESOP, there is no federal or Pennsylvania income tax due on the ESOP’s share of the income. An ESOP is a qualified employee benefit plan under the Employee Retirement Income Security Act (ERISA), which makes it a tax-exempt entity. For C corporations, contributions and preferred stock dividends paid to the ESOP are tax deductible by the company and are the source of funds to repay debt used to finance the ESOP transaction. This has the effect of giving the company the ability to repay principal on debt with pretax dollars, which is very tax efficient.

Ability to Generate Liquidity while Maintaining Control

Owners selling to an ESOP do not need to sell 100% of their stock; they can sell a minority interest. This allows the owner to take some money off the table while still maintaining operational control of their company. Selling a minority stake also allows an owner to “test drive” the ESOP before they commit to selling 100% of their stock. Many owners choose to sell their stock to an ESOP over a period of years to spread out the financial impact. With most other transition options, the transfer of ownership in the company also means a transfer of the leadership. With an ESOP, an owner can sell their shares but continue in their role at the company after the sale. Selling to an ESOP gives the owner flexibility to exit from day-to-day work at their own pace and on their own timeline.

Selling and Still Being an Owner

If the company is an S corporation, the shareholders who sell their stock to an ESOP and continue to work at the company can be allocated ownership shares within the ESOP (within certain limitations), with the rest of the employee owners.

Rewarding Employees

Taking care of long-time, loyal employees is a goal for many owners considering an exit strategy. An ESOP offers a way to reward valued team members by providing them with a long-term ownership incentive plan for their retirement as well as more job stability since no third-party buyer is involved.

Community/Job Creation

ESOP companies tend to remain in the communities in which their businesses were built. Companies sold to third- parties often move, resulting in jobs lost in the community. ESOPs keep people employed in the communities in which they live.

Gradual Leadership Succession

Since a sale to an ESOP does not require an automatic change in management and leadership, companies can continue to work on their succession plan before and after the ESOP transaction. This flexibility allows many companies to complete a transaction while continuing to work on management succession.

Better Performance

When employees are given ownership, it positively impacts their behavior because they now have “skin in the game.” Generally, an ESOP company’s performance increases over time because its employees are more engaged and productive. Knowing that they will share in the benefits of the company’s increased performance is a powerful motivational tool. When selling minority tranches as part of a planned succession strategy, the seller can realize increasingly higher share prices as they sell.

Improved Recruitment and Retention

It is expensive to recruit and retain people, and turnover is one of the biggest hidden costs for many companies. ESOPs typically have better retention rates because of the long-term benefits associated with the ESOP. An ESOP is also an attractive recruiting tool by offering a prospective employee a benefit that is not available in many other companies.

ESOP companies often have uniquely positive cultures due to employee ownership. These differences become visible to the market and can serve as a point of differentiation in the way the company interacts with its customers and suppliers. Additionally, customer and supplier relationships with ESOP companies are often viewed as more stable because the business is unlikely to be sold to a third-party.

Over time, this can become a competitive advantage.

Mario O. Vicari, CPA, is a director, audit and accounting, at Kreischer Miller in Horsham, Pa., and head of the firm’s ESOP practice. He can be reached at mvicari@kmco.com.

Kevin McPhillips is executive director of the Pennsylvania Center for Employee Ownership in Havertown, Pa. He can be reached at kevin@paceo.org.

Sign up for weekly professional and technical updates from PICPA's blogs, podcasts, and discussion board topics by completing this form.

Leadership

By Mario O. Vicari, CPA, and Kevin McPhillips

Clients value the insights of their CPAs, and often turn to them when it comes to important decisions, especially something as important as a strategy to transition out of their business. Many strategies can be formulated, but an often-overlooked option is the employee stock ownership plan (ESOP). This blog highlights ESOP benefits so CPAs can be more conversant on this transfer option.

ESOPs were created by Congress in 1974 to provide retirement benefits in the form of beneficial ownership of stock shares (held in a trust) in the company in which the employee works. Employees do not pay for the shares. Rather, the business takes on a loan (to pay the owner) and the federal government and state of Pennsylvania provide a tax abatement to pay down the loan. Very few know about this remarkable program.

Individual Tax Efficiency

If a company is a C corporation when shares are sold to an ESOP, as long as the ESOP owns at least 30% the selling shareholder can defer the federal capital gains tax on the transaction by rolling over the proceeds into a type of security called a qualified replacement property (QRP) after the sale. Pennsylvania is considering a bill to allow the same benefit for state income tax purposes.

Corporate Tax Efficiency

If an S corporation has shares owned by an ESOP, there is no federal or Pennsylvania income tax due on the ESOP’s share of the income. An ESOP is a qualified employee benefit plan under the Employee Retirement Income Security Act (ERISA), which makes it a tax-exempt entity. For C corporations, contributions and preferred stock dividends paid to the ESOP are tax deductible by the company and are the source of funds to repay debt used to finance the ESOP transaction. This has the effect of giving the company the ability to repay principal on debt with pretax dollars, which is very tax efficient.

Ability to Generate Liquidity while Maintaining Control

Owners selling to an ESOP do not need to sell 100% of their stock; they can sell a minority interest. This allows the owner to take some money off the table while still maintaining operational control of their company. Selling a minority stake also allows an owner to “test drive” the ESOP before they commit to selling 100% of their stock. Many owners choose to sell their stock to an ESOP over a period of years to spread out the financial impact. With most other transition options, the transfer of ownership in the company also means a transfer of the leadership. With an ESOP, an owner can sell their shares but continue in their role at the company after the sale. Selling to an ESOP gives the owner flexibility to exit from day-to-day work at their own pace and on their own timeline.

Selling and Still Being an Owner

If the company is an S corporation, the shareholders who sell their stock to an ESOP and continue to work at the company can be allocated ownership shares within the ESOP (within certain limitations), with the rest of the employee owners.

Rewarding Employees

Taking care of long-time, loyal employees is a goal for many owners considering an exit strategy. An ESOP offers a way to reward valued team members by providing them with a long-term ownership incentive plan for their retirement as well as more job stability since no third-party buyer is involved.

Community/Job Creation

ESOP companies tend to remain in the communities in which their businesses were built. Companies sold to third- parties often move, resulting in jobs lost in the community. ESOPs keep people employed in the communities in which they live.

Gradual Leadership Succession

Since a sale to an ESOP does not require an automatic change in management and leadership, companies can continue to work on their succession plan before and after the ESOP transaction. This flexibility allows many companies to complete a transaction while continuing to work on management succession.

Better Performance

When employees are given ownership, it positively impacts their behavior because they now have “skin in the game.” Generally, an ESOP company’s performance increases over time because its employees are more engaged and productive. Knowing that they will share in the benefits of the company’s increased performance is a powerful motivational tool. When selling minority tranches as part of a planned succession strategy, the seller can realize increasingly higher share prices as they sell.

Improved Recruitment and Retention

It is expensive to recruit and retain people, and turnover is one of the biggest hidden costs for many companies. ESOPs typically have better retention rates because of the long-term benefits associated with the ESOP. An ESOP is also an attractive recruiting tool by offering a prospective employee a benefit that is not available in many other companies.

ESOP companies often have uniquely positive cultures due to employee ownership. These differences become visible to the market and can serve as a point of differentiation in the way the company interacts with its customers and suppliers. Additionally, customer and supplier relationships with ESOP companies are often viewed as more stable because the business is unlikely to be sold to a third-party.

Over time, this can become a competitive advantage.

Mario O. Vicari, CPA, is a director, audit and accounting, at Kreischer Miller in Horsham, Pa., and head of the firm’s ESOP practice. He can be reached at mvicari@kmco.com.

Kevin McPhillips is executive director of the Pennsylvania Center for Employee Ownership in Havertown, Pa. He can be reached at kevin@paceo.org.

Sign up for weekly professional and technical updates from PICPA's blogs, podcasts, and discussion board topics by completing this form.

Practice Management

By Mario O. Vicari, CPA, and Kevin McPhillips

Clients value the insights of their CPAs, and often turn to them when it comes to important decisions, especially something as important as a strategy to transition out of their business. Many strategies can be formulated, but an often-overlooked option is the employee stock ownership plan (ESOP). This blog highlights ESOP benefits so CPAs can be more conversant on this transfer option.

ESOPs were created by Congress in 1974 to provide retirement benefits in the form of beneficial ownership of stock shares (held in a trust) in the company in which the employee works. Employees do not pay for the shares. Rather, the business takes on a loan (to pay the owner) and the federal government and state of Pennsylvania provide a tax abatement to pay down the loan. Very few know about this remarkable program.

Individual Tax Efficiency

If a company is a C corporation when shares are sold to an ESOP, as long as the ESOP owns at least 30% the selling shareholder can defer the federal capital gains tax on the transaction by rolling over the proceeds into a type of security called a qualified replacement property (QRP) after the sale. Pennsylvania is considering a bill to allow the same benefit for state income tax purposes.

Corporate Tax Efficiency

If an S corporation has shares owned by an ESOP, there is no federal or Pennsylvania income tax due on the ESOP’s share of the income. An ESOP is a qualified employee benefit plan under the Employee Retirement Income Security Act (ERISA), which makes it a tax-exempt entity. For C corporations, contributions and preferred stock dividends paid to the ESOP are tax deductible by the company and are the source of funds to repay debt used to finance the ESOP transaction. This has the effect of giving the company the ability to repay principal on debt with pretax dollars, which is very tax efficient.

Ability to Generate Liquidity while Maintaining Control

Owners selling to an ESOP do not need to sell 100% of their stock; they can sell a minority interest. This allows the owner to take some money off the table while still maintaining operational control of their company. Selling a minority stake also allows an owner to “test drive” the ESOP before they commit to selling 100% of their stock. Many owners choose to sell their stock to an ESOP over a period of years to spread out the financial impact. With most other transition options, the transfer of ownership in the company also means a transfer of the leadership. With an ESOP, an owner can sell their shares but continue in their role at the company after the sale. Selling to an ESOP gives the owner flexibility to exit from day-to-day work at their own pace and on their own timeline.

Selling and Still Being an Owner

If the company is an S corporation, the shareholders who sell their stock to an ESOP and continue to work at the company can be allocated ownership shares within the ESOP (within certain limitations), with the rest of the employee owners.

Rewarding Employees

Taking care of long-time, loyal employees is a goal for many owners considering an exit strategy. An ESOP offers a way to reward valued team members by providing them with a long-term ownership incentive plan for their retirement as well as more job stability since no third-party buyer is involved.

Community/Job Creation

ESOP companies tend to remain in the communities in which their businesses were built. Companies sold to third- parties often move, resulting in jobs lost in the community. ESOPs keep people employed in the communities in which they live.

Gradual Leadership Succession

Since a sale to an ESOP does not require an automatic change in management and leadership, companies can continue to work on their succession plan before and after the ESOP transaction. This flexibility allows many companies to complete a transaction while continuing to work on management succession.

Better Performance

When employees are given ownership, it positively impacts their behavior because they now have “skin in the game.” Generally, an ESOP company’s performance increases over time because its employees are more engaged and productive. Knowing that they will share in the benefits of the company’s increased performance is a powerful motivational tool. When selling minority tranches as part of a planned succession strategy, the seller can realize increasingly higher share prices as they sell.

Improved Recruitment and Retention

It is expensive to recruit and retain people, and turnover is one of the biggest hidden costs for many companies. ESOPs typically have better retention rates because of the long-term benefits associated with the ESOP. An ESOP is also an attractive recruiting tool by offering a prospective employee a benefit that is not available in many other companies.

ESOP companies often have uniquely positive cultures due to employee ownership. These differences become visible to the market and can serve as a point of differentiation in the way the company interacts with its customers and suppliers. Additionally, customer and supplier relationships with ESOP companies are often viewed as more stable because the business is unlikely to be sold to a third-party.

Over time, this can become a competitive advantage.

Mario O. Vicari, CPA, is a director, audit and accounting, at Kreischer Miller in Horsham, Pa., and head of the firm’s ESOP practice. He can be reached at mvicari@kmco.com.

Kevin McPhillips is executive director of the Pennsylvania Center for Employee Ownership in Havertown, Pa. He can be reached at kevin@paceo.org.

Sign up for weekly professional and technical updates from PICPA's blogs, podcasts, and discussion board topics by completing this form.

Technology

By Mario O. Vicari, CPA, and Kevin McPhillips

Clients value the insights of their CPAs, and often turn to them when it comes to important decisions, especially something as important as a strategy to transition out of their business. Many strategies can be formulated, but an often-overlooked option is the employee stock ownership plan (ESOP). This blog highlights ESOP benefits so CPAs can be more conversant on this transfer option.

ESOPs were created by Congress in 1974 to provide retirement benefits in the form of beneficial ownership of stock shares (held in a trust) in the company in which the employee works. Employees do not pay for the shares. Rather, the business takes on a loan (to pay the owner) and the federal government and state of Pennsylvania provide a tax abatement to pay down the loan. Very few know about this remarkable program.

Individual Tax Efficiency

If a company is a C corporation when shares are sold to an ESOP, as long as the ESOP owns at least 30% the selling shareholder can defer the federal capital gains tax on the transaction by rolling over the proceeds into a type of security called a qualified replacement property (QRP) after the sale. Pennsylvania is considering a bill to allow the same benefit for state income tax purposes.

Corporate Tax Efficiency

If an S corporation has shares owned by an ESOP, there is no federal or Pennsylvania income tax due on the ESOP’s share of the income. An ESOP is a qualified employee benefit plan under the Employee Retirement Income Security Act (ERISA), which makes it a tax-exempt entity. For C corporations, contributions and preferred stock dividends paid to the ESOP are tax deductible by the company and are the source of funds to repay debt used to finance the ESOP transaction. This has the effect of giving the company the ability to repay principal on debt with pretax dollars, which is very tax efficient.

Ability to Generate Liquidity while Maintaining Control

Owners selling to an ESOP do not need to sell 100% of their stock; they can sell a minority interest. This allows the owner to take some money off the table while still maintaining operational control of their company. Selling a minority stake also allows an owner to “test drive” the ESOP before they commit to selling 100% of their stock. Many owners choose to sell their stock to an ESOP over a period of years to spread out the financial impact. With most other transition options, the transfer of ownership in the company also means a transfer of the leadership. With an ESOP, an owner can sell their shares but continue in their role at the company after the sale. Selling to an ESOP gives the owner flexibility to exit from day-to-day work at their own pace and on their own timeline.

Selling and Still Being an Owner

If the company is an S corporation, the shareholders who sell their stock to an ESOP and continue to work at the company can be allocated ownership shares within the ESOP (within certain limitations), with the rest of the employee owners.

Rewarding Employees

Taking care of long-time, loyal employees is a goal for many owners considering an exit strategy. An ESOP offers a way to reward valued team members by providing them with a long-term ownership incentive plan for their retirement as well as more job stability since no third-party buyer is involved.

Community/Job Creation

ESOP companies tend to remain in the communities in which their businesses were built. Companies sold to third- parties often move, resulting in jobs lost in the community. ESOPs keep people employed in the communities in which they live.

Gradual Leadership Succession

Since a sale to an ESOP does not require an automatic change in management and leadership, companies can continue to work on their succession plan before and after the ESOP transaction. This flexibility allows many companies to complete a transaction while continuing to work on management succession.

Better Performance

When employees are given ownership, it positively impacts their behavior because they now have “skin in the game.” Generally, an ESOP company’s performance increases over time because its employees are more engaged and productive. Knowing that they will share in the benefits of the company’s increased performance is a powerful motivational tool. When selling minority tranches as part of a planned succession strategy, the seller can realize increasingly higher share prices as they sell.

Improved Recruitment and Retention

It is expensive to recruit and retain people, and turnover is one of the biggest hidden costs for many companies. ESOPs typically have better retention rates because of the long-term benefits associated with the ESOP. An ESOP is also an attractive recruiting tool by offering a prospective employee a benefit that is not available in many other companies.

ESOP companies often have uniquely positive cultures due to employee ownership. These differences become visible to the market and can serve as a point of differentiation in the way the company interacts with its customers and suppliers. Additionally, customer and supplier relationships with ESOP companies are often viewed as more stable because the business is unlikely to be sold to a third-party.

Over time, this can become a competitive advantage.

Mario O. Vicari, CPA, is a director, audit and accounting, at Kreischer Miller in Horsham, Pa., and head of the firm’s ESOP practice. He can be reached at mvicari@kmco.com.

Kevin McPhillips is executive director of the Pennsylvania Center for Employee Ownership in Havertown, Pa. He can be reached at kevin@paceo.org.

Sign up for weekly professional and technical updates from PICPA's blogs, podcasts, and discussion board topics by completing this form.

Tax

By Mario O. Vicari, CPA, and Kevin McPhillips

Clients value the insights of their CPAs, and often turn to them when it comes to important decisions, especially something as important as a strategy to transition out of their business. Many strategies can be formulated, but an often-overlooked option is the employee stock ownership plan (ESOP). This blog highlights ESOP benefits so CPAs can be more conversant on this transfer option.

ESOPs were created by Congress in 1974 to provide retirement benefits in the form of beneficial ownership of stock shares (held in a trust) in the company in which the employee works. Employees do not pay for the shares. Rather, the business takes on a loan (to pay the owner) and the federal government and state of Pennsylvania provide a tax abatement to pay down the loan. Very few know about this remarkable program.

Individual Tax Efficiency

If a company is a C corporation when shares are sold to an ESOP, as long as the ESOP owns at least 30% the selling shareholder can defer the federal capital gains tax on the transaction by rolling over the proceeds into a type of security called a qualified replacement property (QRP) after the sale. Pennsylvania is considering a bill to allow the same benefit for state income tax purposes.

Corporate Tax Efficiency

If an S corporation has shares owned by an ESOP, there is no federal or Pennsylvania income tax due on the ESOP’s share of the income. An ESOP is a qualified employee benefit plan under the Employee Retirement Income Security Act (ERISA), which makes it a tax-exempt entity. For C corporations, contributions and preferred stock dividends paid to the ESOP are tax deductible by the company and are the source of funds to repay debt used to finance the ESOP transaction. This has the effect of giving the company the ability to repay principal on debt with pretax dollars, which is very tax efficient.

Ability to Generate Liquidity while Maintaining Control

Owners selling to an ESOP do not need to sell 100% of their stock; they can sell a minority interest. This allows the owner to take some money off the table while still maintaining operational control of their company. Selling a minority stake also allows an owner to “test drive” the ESOP before they commit to selling 100% of their stock. Many owners choose to sell their stock to an ESOP over a period of years to spread out the financial impact. With most other transition options, the transfer of ownership in the company also means a transfer of the leadership. With an ESOP, an owner can sell their shares but continue in their role at the company after the sale. Selling to an ESOP gives the owner flexibility to exit from day-to-day work at their own pace and on their own timeline.

Selling and Still Being an Owner

If the company is an S corporation, the shareholders who sell their stock to an ESOP and continue to work at the company can be allocated ownership shares within the ESOP (within certain limitations), with the rest of the employee owners.

Rewarding Employees

Taking care of long-time, loyal employees is a goal for many owners considering an exit strategy. An ESOP offers a way to reward valued team members by providing them with a long-term ownership incentive plan for their retirement as well as more job stability since no third-party buyer is involved.

Community/Job Creation

ESOP companies tend to remain in the communities in which their businesses were built. Companies sold to third- parties often move, resulting in jobs lost in the community. ESOPs keep people employed in the communities in which they live.

Gradual Leadership Succession

Since a sale to an ESOP does not require an automatic change in management and leadership, companies can continue to work on their succession plan before and after the ESOP transaction. This flexibility allows many companies to complete a transaction while continuing to work on management succession.

Better Performance

When employees are given ownership, it positively impacts their behavior because they now have “skin in the game.” Generally, an ESOP company’s performance increases over time because its employees are more engaged and productive. Knowing that they will share in the benefits of the company’s increased performance is a powerful motivational tool. When selling minority tranches as part of a planned succession strategy, the seller can realize increasingly higher share prices as they sell.

Improved Recruitment and Retention

It is expensive to recruit and retain people, and turnover is one of the biggest hidden costs for many companies. ESOPs typically have better retention rates because of the long-term benefits associated with the ESOP. An ESOP is also an attractive recruiting tool by offering a prospective employee a benefit that is not available in many other companies.

ESOP companies often have uniquely positive cultures due to employee ownership. These differences become visible to the market and can serve as a point of differentiation in the way the company interacts with its customers and suppliers. Additionally, customer and supplier relationships with ESOP companies are often viewed as more stable because the business is unlikely to be sold to a third-party.

Over time, this can become a competitive advantage.

Mario O. Vicari, CPA, is a director, audit and accounting, at Kreischer Miller in Horsham, Pa., and head of the firm’s ESOP practice. He can be reached at mvicari@kmco.com.

Kevin McPhillips is executive director of the Pennsylvania Center for Employee Ownership in Havertown, Pa. He can be reached at kevin@paceo.org.

Sign up for weekly professional and technical updates from PICPA's blogs, podcasts, and discussion board topics by completing this form.