While many retirement plans involve investing in stocks, bonds, or mutual funds, Employee Stock Ownership Plans (ESOPs) turn a company’s own workers into its shareholders. This exit strategy continues to gain traction — ESOPs manage over $2 trillion in assets across more than 6,300 U.S. companies with more than 14 million participants, according to the National Center for Employee Ownership.
Greg Block and Craig Cerbins, two of First Business Bank’s commercial banking experts, provide insights about ESOPs from firsthand experience guiding clients through the financial complexities of ESOP transitions and ongoing ESOP operations.
Benefits of ESOPs
ESOPs offer many advantages for business owners and employees. While allowing owners to gradually transition out of their businesses, ESOPs also provide tax benefits, improve employee retention and productivity, and preserve the legacy of the business.
“ESOPs create a sustainable ownership model that rewards the workforce and can improve employee morale and engagement in meaningful ways,” Block said. “Studies have shown that ESOP companies often outperform non-ESOPs in productivity, profitability, and employee satisfaction.”
ESOP considerations for business owners
Careful planning is essential to improve success throughout the ESOP transition.
“Start planning early, as ownership transition takes time and companies need to be in the best possible position before initiating the transition,” said Cerbins. “Owners often significantly underestimate the time it takes to transition company ownership.”
Important steps include:
- Assess Company Readiness: Evaluate financial stability and growth potential. ESOPs work best for companies with consistent cash flow and a strong management team.
- Seek Expert Guidance: Partner with advisors experienced in ESOP transactions, including bankers, attorneys, and valuation experts.
- Educate Employees: Inform staff about the ESOP concept in advance. Their buy-in is essential for a smooth transition.
- Plan for Costs: Consider the expenses associated with setting up and maintaining an ESOP, including annual valuations and financial reporting.
ESOP success and your banking partner
Choosing a banking partner with extensive ESOP experience helps to avoid pitfalls and ensure long-term success. An experienced banker can guide you through the complexities of ESOP structures and operations.
“Your banking partner should understand the cash flow dynamics and repurchase obligations inherent in ESOP structures,” Block said. “Having experience with other ESOPs is very important, and their bank needs to assist with complex financial needs.”
A knowledgeable banking partner can also help structure financing to balance needs of the seller, the company, and the ESOP trust, while complying with regulatory requirements.
Is an ESOP right for your business?
Both experts agree that while ESOPs are excellent for many companies, they’re not right for everyone.
“It’s important to weigh all your options,” Cerbins said. “Consider your company’s specific circumstances, financial health, and long-term goals before deciding. At First Business Bank, we’re here to guide business owners through this process. We can help evaluate if an ESOP aligns with your company’s objectives and assist in structuring a transition that works for everyone involved.”
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Authors:
Greg Block, Vice President – Commercial Banking
Greg Block brings over 18 years of diverse banking experience, specializing in Commercial Banking, Private Banking, Portfolio Management, and Credit Administration. His expertise lies in serving family and privately owned businesses, particularly commercial and industrial companies, where he develops effective growth strategies while minimizing financial risks. Greg also collaborates with the Private Wealth team to offer strategic guidance to owners and executives on managing and expanding their personal finances.
Craig Cerbins, Vice President – Commercial Banking
Craig Cerbins began his career at First Business Bank in 2010 as a Credit Analyst, advancing to his current role by 2017, and rejoined the bank in 2022 after a brief hiatus. As a commercial banker, Craig partners with companies and organizations in manufacturing, distribution, and non-profit sectors, specializing in helping businesses plan for long-term success. His expertise extends to assisting companies with Employee Stock Ownership Plans (ESOPs) and other strategic initiatives that promote sustainable growth and succession planning.
