Employee ownership takes careful management
- By David Hubler
- Aug 31, 2007
Companies that are structured as employee stock ownership plans offer numerous tax advantages to the company and their employee shareholders, said Kreg Jackson, director and co-chairman of the national ESOP practice at Houlihan Lokey Howard and Zukin investment bankers.
But there also are aspects that require management's continuing close attention.
Because the employees initially hold a note on the company, ESOPs are required to make annual debt repayments into employee accounts. If you start to pay that note between the company and the ESOP too quickly, you could push too much value into employees' accounts, overcompensating them, he said.
ESOP company executives must also be aware of repurchase obligations, Jackson said. If a group of employees chooses to retire about the same time and they exercise their option under the repurchase obligation, there could be a significant amount of cash flowing to them as shareholders.
"You've always got to be very cognizant of ... the demographics of your employee base and ... how big this potential repurchase obligation might end up being," he said.
Jackson advises his ESOP clients to understand their repurchase liability because "when you don't monitor it and it sneaks up on you, you have a much more constrained set of options to try to deal with it."
Management must also decide whether to include new employees in the ESOP when the company acquires another firm, he said. A stand-alone subsidiary with its own infrastructure and benefits plan that is not going to be integrated into the purchasing company may not be an issue.
But he warned against creating a have and have-not situation. "What you don't want to have is one [employee] saying, 'I've got this ESOP account balance, which is the greatest thing since sliced bread,' and then you've got the person right next to him saying, 'I want in, but I can't get in.'"
Jackson said ESOPs can avoid that situation through the addition of new shares added on an annual basis, "which shouldn't lower their value, especially if the acquired company is worth more than its purchase price."
David Hubler is the former print managing editor for GCN and senior editor for Washington Technology. He is freelance writer living in Annandale, Va.