ESOP as Relationship Builder

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Although planners don’t “profit” directly from helping small-business owners set up employee stock ownership plans (ESOPs), the service can act as an important relationship builder. According to Jerry Ripperger of Principal Financial Group (speaking at the Business and Wealth Management Forum in Denver this week), small-business owners have, on average, about 79 percent of their wealth tied up in their business. Meanwhile, a baby boomer business owner turns 65 every 57 seconds―some of them company rich but cash poor. What is a business owner to do if they don’t have an adequate third-party buyer, management buyout, or family transition in the works?

For business owners with C-Corps or S-Corps―and especially handy for those who live in rural areas where local buyers might not be plentiful, yet the owner wishes to keep the company local―ESOPs offer a way to help the owner sell all or part of his or her privately held company. Essentially, they are borrowing against future earnings to fund employee retirement accounts with company stock, pre-tax. Employees become owners, which for many will also improve company loyalty.

Ripperger reports that only 4.5 percent of privately held businesses have ESOPs, yet certainly there are more small-business owners out there who are unsure how to transition their practice when the time comes to retire. And don’t just think small; Ripperger says 40 percent of Fortune 500 companies are privately held. But he estimates, in general, that a company should have at least $5 million−$7 million and 30+ employees for the cost/benefit analysis of an ESOP to make sense.

Helping small-business owner clients move through the challenges of succession planning will build your standing as a trusted adviser, and once those clients move from company rich to cash rich, you’ll be able to help them with retirement planning as well.

Christina Nelson
Managing Editor
Journal of Financial Planning
Financial Planning Association

One thought on “ESOP as Relationship Builder

  1. Nice post in there. You are right, it is a simple human resources factor in stimulating business performance. Nice post Christina. Thanks.

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