If you own a family-run manufacturing business, you know how critical it is to plan for the future. However, family-owned manufacturers are increasingly foregoing traditional succession plans in favor of employee ownership.
More and more manufacturing businesses are exploring Employee Stock Ownership Plans (ESOP) to ensure long-term sustainability. But what is an ESOP, and is it the right choice for your family’s business? Here’s everything you need to know.
ESOPs Explained
An Employee Stock Ownership Plan is a benefit plan that gives employees partial ownership of a company. Specifically, these plans offer employees company stocks as part of their benefits package.
Employees who continue their tenure at your company accumulate stocks in trust and eventually become partial owners.
This benefit plan is excellent for employees who might be increasingly incentivized to stay with your company long-term. Still, ESOPs are also an excellent alternative to other types of ownership changes, such as sales to competitors or private equity. More than that, an ESOP can help maintain your family manufacturing company’s long-term business continuity and culture.
ESOPs are especially prevalent among manufacturing businesses. According to the National Center for Employee Ownership, at least 25% of the more than 6,500 ESOP companies in the U.S. are in the manufacturing category. Manufacturers across the country are increasingly adopting ESOPs.
Benefits of an ESOP for Your Family Business
While an ESOP being suitable for family owners may seem counterintuitive, there are several key benefits that they bring to any company, including:
- Employee Retention & Productivity: Long-tenured employees, especially manufacturers, are good for any company. With an ESOP, employees will be more incentivized to keep putting their best foot forward at your company for years.
- Attracting Talent: In the current competitive labor market, manufacturing companies need all the help they can get in attracting new talent. An ESOP is an especially attractive part of a benefit plan for potential workers.
- Tax Advantages: ESOPs have significant financial and tax advantages for companies. This is because contributions to an ESOP are tax-deductible, and a company may become eligible for other tax incentives.
- Cultural Continuity: ESOPs can help a company maintain its long-standing culture in the long term. For family-owned manufacturing companies, this is especially helpful in ensuring that the company is owned by a loyal, stable workforce that understands the culture that your family has created.
- Succession Planning: ESOPs are an excellent and viable alternative to other sale options, such as selling your family business to a competitor of a private equity firm. An ESOP can also help deal with potential succession issues, especially if family members are uninterested in continuing the family business.
Of course, because an ESOP generally means your business is more financially stable during a sale, they’re also an excellent way to boost your company’s revenue and access to liquid capital. This capital can be used to invest in new equipment, employee training programs, or other strategic upgrades that can help boost your business in the short, medium, and long term.
How to Switch Your Family Manufacturing Business to an ESOP
As we’ve seen, an ESOP is an excellent long-term strategy for many kinds of businesses — especially smaller manufacturing businesses. Actually implementing an ESOP, however, is a multi-step process that requires careful planning and consulting with experts, such as an analyst who offers ESOP advisory services.
If you’re interested in implementing an ESOP in your family-owned manufacturing company, you should take a few important steps.
- Review your financials: ESOPs may benefit all kinds of businesses, but your primary focus is still sustainable business growth and financial health. Before making any sort of major ownership move, be sure to review your business’s finances.
- Speak with experts: Once you decide that your business is the right choice for your company, you must engage experts with experience in implementing an ESOP. This could include ESOP advisors, financial advisors, and your legal counsel.
- Decide on the details: Although an ESOP advisor will help you along, there are still some important decisions to make about your plan, including eligibility for workers, stock allocations, and funding sources.
- Educate your workforce: Once the details and plan are in the works, it’s time to educate your employees. Make sure to give them details about the rollout timeline, their responsibilities as partial owners, and other aspects of the ESOP.
ESOPs are an excellent way to retain employees, maintain business stability, and ensure your business’s long-term legacy for years.