Ep. 60 — Why ESOPs Boost Performance and Profits

Welcome to the "Show Me The Way" podcast with David Seitter

In this episode of "Show Me the Way," Dave and Kelly Finnell, President of Executive Financial Services, returns to the podcast to discuss the current landscape of Employee Stock Ownership Plans (ESOPs). Kelly discusses the new involvement of the SBA in ESOP lending, the increasing attractiveness of ESOPs for companies of various sizes, and the advantages of ESOPs for business succession planning.

Ep. 60 — Why ESOPs Boost Performance and Profits

In recent years, significant changes have impacted ESOPs. Notably, the Small Business Administration (SBA) has become involved in financing ESOP transactions. Since Congress authorized this in 2020, the SBA's 7A program now allows companies to borrow up to five million dollars without requiring personal guarantees, offering a ten-year term and amortization. This development empowers businesses, especially smaller ones, to leverage ESOPs more effectively.

Furthermore, the acceptance of ESOPs among large firms has grown, with companies like BDO opting for employee ownership over private equity, illustrating the sophistication and credibility of ESOPs in today’s business environment.

The Psychological and Financial Benefits of ESOPs

ESOPs not only provide financial returns but also enhance company culture. Employees with equity stakes are generally more motivated, leading to better performance and profitability. Kelly emphasizes that a robust compensation plan should include a base salary, a short-term incentive bonus, and a long-term equity-based component, aligning the interests of both employees and employers.

Interest Rates and Banking Considerations

Despite increases in interest rates, ESOP financing remains accessible. Kelly explains that structuring transactions with a combination of company cash, bank loans, and seller notes ensures ESOPs remain financially viable, even in changing economic climates.

Political Stability for ESOPs

ESOPs have garnered bipartisan support, appealing to legislators across the political spectrum. Democrats appreciate the wealth distribution aspect, while Republicans are attracted to the tax benefits ESOPs offer. This broad support ensures ESOP stability regardless of changes in political leadership.

Compassionate Capitalism and ESOPs

Over his career, Kelly has observed two types of business owners: those focused solely on personal gain and those who view the sale of their company as an opportunity to benefit themselves, their employees, and their communities. The latter group embraces what Kelly terms "compassionate capitalism," where selling to an ESOP not only provides fair market value but also enriches employees and potentially creates community benefits through strategic philanthropic planning.

Costs and Professional Involvement

Although setting up an ESOP involves multiple legal and financial professionals, it remains cost-effective compared to selling to private equity, as it typically does not require an investment banker. These savings can make ESOPs a compelling option for many medium-sized businesses.

Future Outlook

Looking ahead, Kelly plans to continue expanding Executive Financial Services, leveraging his team's expertise to further serve business owners navigating their succession and exit strategies. With the baby boomer generation contemplating retirement, the demand for effective succession planning, including ESOPs, is expected to rise substantially.

 

For businesses considering ESOPs, Kelly Finnell and his team at Executive Financial Services offer a wealth of experience and guidance. ESOPs present a viable and increasingly popular path for business transitions, aligning the goals of business owners, employees, and the broader community.

 

Those interested in learning more can connect with Kelly through his company's website at execfin.com or on LinkedIn.

 

 

 

To reach out to Dave for advice or consultation, please visit www.davidseitter.com or email him at dseitter@spencerfane.com

 

Disclosure

This podcast is provided for educational purposes. It does not constitute legal advice and is not intended to establish an attorney-client relationship. The recommendations contained in this podcast are not necessarily appropriate for every individual or business. In determining the best course of action, business owners should consult with an attorney on their distinct circumstances.