A Booming Opportunity for Financial Professionals: Business Owners and ESOPs

Among the massive waves of Baby Boomers heading into retirement are a significant number of business owners who face a dilemma—they want to transition into retirement but, for many, the bulk of their nest egg is tied up in the business itself.
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Not every business owner wants to sell a life’s work to a third party who might lay off employees, move the business to another state, or worse, close it down and use the intellectual capital elsewhere.  Selling to employees through an employee stock ownership plan (ESOP) can be a great approach for many of these business owners.

An ESOP keeps the business running, allows owners to transition out on their own timetable and liquidates the assets needed to retire.   Unfortunately many business owners have little or no knowledge of ESOPs.  Financial professionals who can introduce them to ESOPs have an opportunity to grow their practice and generate additional revenue.

An ESOP is a qualified defined contribution retirement plan with two unique features.  First, it is invested primarily in the stock of the sponsoring company.  Second, it has the ability to borrow money (which would be a prohibited transaction in other retirement plans).  An ESOP allows a company to borrow against future earnings to buy all or a portion of the stock from a selling owner today to be repaid with pretax dollars. 

Now is a great time to promote the ESOP concept to business owners.   The numbers speak for themselves.  

·         $4.8 trillion – the value of privately held stock for those age 55 to 70 in the United States[1]

·         57 – the number of seconds it takes for a Baby Boomer business owner to turn age 65[2] 

·         87 – the percent of business owners who do not have a formal succession plan[3]

·         14 – the percent of businesses that will successfully transfer to a second generation[4]

Typically, financial professionals are not directly compensated by introducing an ESOP, but ESOPs can pay off in many other ways.  They can be a door opener to have multiple conversations with the business owner, the chief financial officer, and others in the executive suite.

[1] Scaling the pre-retiree market, LIMRA 2010

[2] Dancing in the End Zone: The Business Owner’s Exit Planning Playbook, Patrick Ungashick, 2008

[3] White Horse Advisors Survey, July 2008

[4] Ibid.

The resulting relationships can lead to multiple opportunities to sell financial products and services: 

·         Investment of sale proceeds.  When a business owner sells to an ESOP it generates either an immediate liquidity event or a flow of funds over several years.  The financial professional can help the selling owner with the investment of these assets and help manage the tax consequences.

·         Estate planning.  Upon sale the owner finds that their portfolio has typically changed significantly.  This is a great time to review their estate plan to make sure it continues to meet their goals and objectives. 

·         Business owner and executive solutions.  As the company goes through an ownership transition it is often critical to keep the management team in place and to protect the business operations from the loss of any key staff member.  If external financing is used to finance the ESOP the bank may require some type of coverage.  Financial professionals can raise this important topic, evaluate the needs, and offer solutions. 

·         Funding repurchase liability.  The ESOP is a retirement plan.  As participants have benefit events the plan or company needs to be prepared to fund those benefit payments.  Using corporate owned life insurance can be a cost effective way to fund this repurchase liability obligation. 

·         Other qualified and nonqualified retirement plans.  In addition to the ESOP, a company typically has a 401(k) plan and potentially other qualified and non-qualified plans.  Helping the company manage them as an overall program can assure that they are meeting their budget and retirement readiness goals. 

ESOPs provide an attractive way for many business owners to manage ownership succession.  And they can be good for financial professionals.

But you don’t have to be an expert on ESOPs to bring the solution to owners. You can be a facilitator who brings in an experienced ESOP consultant to provide the technical expertise.  By helping business owners understand the advantages of employee stock ownership plans, you can deepen your relationships—and potentially expand your client and revenue base.   

Jerry Ripperger is vice president of consulting for retirement and investor services at the Principal Financial Group. For more than 24 years, he has been involved in developing and implementing employee benefit programs for owners and employees of growing businesses, and currently specializes in Employee Stock Ownership Programs. Ripperger tours the country educating advisers about the benefits of introducing ESOPs to their business owner clients. Ripperger's articles have been published in HR Magazine, HR.com, Employee Benefit News, Broker World, and Best’s Review and his media experience includes the Associated Press, New York Times, BusinessWeek, Forbes, CNN/Money, Dow Jones, and the Wall Street Journal. He can be reached at ripperger.jerry@principal.com

Timothy Cleary is vice president of consulting in retirement and investor services at The Principal. He has nearly 20 years of experience in designing, implementing and consulting on employee stock ownership plans for closely-held and public companies. Cleary leads the team which analyzes and designs ESOP transactions from a financial perspective to enable the company, individual shareholders and executives to achieve their goals through the transaction. Cleary is a member of the finance committee of the ESOP Association, the Minnesota Chapter ESOP Association, the National Center for Employee Ownership, the American Bar Association and the Minnesota Bar Association.  He can be reached at cleary.tim@principal.com   


NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.