Employee Stock Ownership Plans
Have a client who’s interested in an Employee Stock Ownership Plan (ESOP)? That’s great. We’re here to help.
The basics of ESOPs
So what exactly is an ESOP? It’s a type of qualified retirement plan. And it can help a business:
- Buy out one or more owners
- Give employees a retirement benefit
- Raise capital or build debt capacity
An ESOP offers a lot of benefits to the owner and company, like:
- Allow a business owner to control how and when they will transition their business
- Encourages employee ownership and engagement
- Generates tax benefits (for the owner and the company)
- Keep business intact and jobs in the community
Companies with the following characteristics are generally good candidates for an ESOP:
- Privately held corporations (either C or S)
- Stable businesses with established clients and markets
- Demonstrated history of strong, predictable profits and cash flows
- Experienced management team
- At least 30 employees; high tenure, low turnover
- Seller(s) with clear objectives and time frames
Why consider an ESOP?
Setting up an ESOP could open up opportunities for you. For example:
- It can unlocks assets in the business for investment – a potential recurring revenue stream for you
- Provide unique access to board and C-suite
- When setting up an ESOP, owners tend to look over their management compensation packages. That could lead to executive compensation plans.
- ESOPs can create needs for life and disability insurance.
- Expanded referral sources by working with the client’s accountants or attorneys during the process.
How does an ESOP work?
- Determine feasibility
- The company forms a trust and establishes the retirement plan.
- The company gets financing; then it lends the proceeds to the ESOP trust to buy out all or some of the owner’s shares (that’s optional).
- The company contributes to the trust each year.
- The trust uses the contributions to repay the loan.
- As the trust repays the loan, shares are allocated to the employee accounts.
- When an employee leaves or retires, his or her shares are redeemed for cash.
What’s involved with starting an ESOP?
We can provide insight to help you and your client to:
- Review feasibility
- Have a stock valuation performed
- Hire an ESOP advisory team, including an attorney
- Get financing
- Establish a trust for the ESOP
Overcoming client worries
Maybe you think your client would be a good fit for an ESOP. But the client has some worries. For instance, your client may be thinking:
- I’ll lose control of the company.
- I’ll have to sell the whole company.
- I could make more money by selling to a third party.
- The company will have to share all of the financial information to employees.
- An ESOP is too expensive.
- ESOPs are just for big companies.
- ESOPs are hard for employees to understand and appreciate.
Help the client know the facts. These common ESOP questions will help.
Here’s a list of helpful ESOP marketing materials.
Don't see what you're looking for? Find more ESOP marketing materials.
ESOP Capabilities Flier (PQ10737)
Flier highlighting Employee Stock Ownership Plan services and Principal Total Retirement Suite.
Introduction to ESOP Video email (PQ12042)
Prospecting email template to introduce the concept of an ESOP to business owners by sharing a short video. It shows the advantages ESOPs can offer in retirement — like flexibility and control, liquidity, legacy, tax breaks and increased productivity and profitability.
Think You Know ESOP’s email (HZ2441)
Prospecting email template that shares further benefits of an ESOP and the wide range of companies that should consider an ESOP.
Common ESOP Questions (PQ11102)
This piece provides information to help you address common questions business owners have about ESOPs.
ESOP Consideration Survey (PQ11060)
Answer eight quick questions to see if an ESOP can be a good fit for a client or prospect.
This site is intended to be educational in nature and is not intended to be taken as a recommendation.
The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.