ESOP Experts Discuss Why There Aren’t More ESOPs
January 10, 2024
ESOPs are an excellent exit strategy for many business owners, but that doesn’t necessarily make them plentiful. As noted by Mary Josephs of Verit Advisors, of the estimated 1.56 million U.S. companies with 10 employees or more that the North American Industry Classification System (NAICS) counts, in 2020, there were only 6,232 companies with ESOPs (by the National Center for Employee Ownership’s tally). And in 2022, private equity deals outnumbered ESOPs by nearly 11 to 1.
Research conducted by Verit Advisors provided some insights into why there aren’t more ESOPs, given that they can provide so many benefits. After surveying leaders from 200 companies across various industries (including 90 that had completed a full or partial ESOP, 80 that are considering one, and 30 that aren’t), Verit Advisors identified five key factors that impact a company’s interest in an ESOP:
- Regulatory requirements. Reporting requirements can be intimidating for some business leaders.
- Tax savings. Company founders tend to favor personal tax savings, and non-founder CEOs prefer corporate tax savings.
- Workplace culture and employee benefits. Research shows that turnover at ESOP-owned companies is three times less than other companies.
- Insights of peers. Business leaders of prospective ESOPs often gain meaningful information from peer companies.
- Awareness. Business leaders suggested that their advisors do more to increase awareness of ESOPs.
Despite the under-utilization of ESOPs, Mary Josephs identified promising developments that may increase the number of ESOPs, including state and federal legislative support for preserving and expanding ESOP benefits and prominent business leaders’ endorsement of ESOPs.
If you have questions about ESOPs, please don’t hesitate to reach out. LP’s ESOP attorneys are here to help. For additional information on how ESOPs work and the ESOP journey, listen to David Solomon’s interview on the ‘Intentional Growth’ Podcast.