ESOPs: The Business Model of the Future for Entrepreneurs?
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ESOPs aren’t just a way to encourage employees to invest – they can also prove very useful for long-term business goals.
News recently came in that a new Colorado bill was just signed into law to make it a lot easier for small business owners to start up ESOPs, or employee stock ownership plans, thanks to a new focus on talking about ESOPs with owners and more funds available to start an ESOP via a small loan.
Now, when people start talking about ESOPs a lot of the focus is traditionally on the benefits for employees – how they can save on taxes, get rewarded by the company, and so on. But we wanted to take some time to talk about why ESOPs are useful for growing companies, and why they are becoming increasingly popular ways of meeting very specific goals that business owners may have in mind. Here’s a more detailed look.
Slow Value Building in Preparation for Bigger Things
Traditional entrepreneurship uses funding rounds to both raise additional funds for expansion and help increase the expected market value of the company. However, if you aren’t nearly ready for a funding round or going public but still want to help increase the value of the company in a much safer, more stable way. An ESOP does exactly that. By allowing employees to slowly and comfortably invest back in the company, the ESOP can help increase value in more controlled ways than a funding round.
Of course, that comes with consequences too: an ESOP can complicate any plans to go public, and it tends to work best with successful companies rather than those struggling. But for smaller businesses that have been looking for their own value-building solution, it remains an ideal choice.
Thanks to the increased interest in ESOPs, it’s now a lot easier to borrow money to help start them. The new CO rule, for example, allows the state to loan business owners up to $10,000 for the process, and if state agencies are more willing to lend, you know that average banks and credit unions are also going to be more lenient. This is great news because one thing keeping smaller companies from creating ESOPs was a lack of funds. It can be surprisingly expensive to switch to an ESOP model for your business, especially if that requires updating financial practices and meeting a bunch of new requirements. Money available for the initial costs is an increasingly common advantage (of course, you still shouldn’t take out a loan you can’t afford).
“Well, of course, an ESOP is a retirement plan,” you may be thinking. But that’s not really what we mean. You see, the goal of many ESOPs is to gradually move ownership from the company founder to the employees. In other words, it can be a valuable exit strategy for business owners that want to gradually back away from personal responsibilities and eventually leave the business entirely – without the stress of making a sale or arrangement a more immediate replacement option.
Ideal for Growth Industries
In Colorado, the new ESOP law is particular encouraging for small companies in growth industries – which in CO would be craft beer and cannabis, of course. ESOPs, in general, are a good deal for young businesses that are riding a wave of growth and want to expand – but aren’t ready to go public for another decade or two. If you are part of a growth industry and are looking for ways to maintain growth and tap into the excitement surrounding your business, then consider creating an ESOP model during your expansion efforts.
General Buy-In and Productivity
“Retention” is a word that gets frequently mentioned when talking about ESOPs. Yes, employees are more likely to stay around if they have a real investment in the company. But in a broader sense, an ESOP is perfect for employee buy-in and productivity, even if the employee chooses to not invest directly. The fact that the company cares enough to allow employees “first dibs” and a chance to profit from company efforts is a winning combination for a successful business. It tends to increase positivity, fuel greater productivity, and attract new interest from talented individuals.
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