Jim Kendall: Is an ESOP in your future?

Updated 7/29/2019 10:03 AM

Maybe it's the people I hang with, but I don't pick up a lot of conversation about ESOPs. Yet Employee Stock Ownership Plans apparently can be an extremely effective tool for a business owner facing a need -- perhaps calendar driven -- to sell a business.

For example, says Julie Govreau, "ESOPs absolutely are a good idea, (especially) for the owner of a small business looking to transition and the kids don't want to take over." ESOPs, she says "are a fantastic tool that allows for the continuity of the business."


Govreau is president of the Illinois chapter of The ESOP Association -- and senior vice president and general counsel of GreatBanc Trust Co., Lisle.

If the idea of selling your business to employees -- one way to cash out and, hopefully, fund your retirement -- is appealing, then look at a caveat or two:

• Your attorney or your accounting firm should be able to provide some information on ESOPs and how they work. But, warns Lee Eisenstaedt, ESOPs fall into the broad employee benefits category, which means ERISA rules come into play and there are tax issues the owner must face. Consequently, Eisenstaedt, co-founder of the Chicago-based Leading with Courage Academy, suggests hooking up with an experienced provider.

• One possible information source Eisenstaedt suggested: The National Center for Employee Ownership (www.nceo.org).

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• Another option: The ESOP Association (www.esopassociation.org), which has an Illinois chapter. The organization's "What is an ESOP?" page is particularly helpful for those new to the ESOP concept.

The following definition is taken from that page: "An employee stock ownership plan (ESOP) is a retirement plan -- in some ways similar to and governed by the same laws and regulations as a 401(k). In other ways, ESOPs are quite different from 401(k)s. When companies launch an ESOP, they form a trust that purchases some or all of the company's shares and holds these in retirement accounts for employees. When the stock value increases or decreases, so does the value of employees' accounts."

For more detail, take a look at https://www.nceo.org/articles/esop-employee-stock-ownership-plan.

There is a long path, Eisenstaedt and others say, between a business owner's initial interest and a functioning ESOP. "This is not a Disneyland venture down a brick road," says Paul Heinze, who figures a start-to-finish ESOP plan could take six to 18 months.


The cost, he adds, can be "a very significant six figures."

Like many other management processes, the ESOP process works more smoothly, Heinze says, "when business owners know what the end game is."

Decisions often are driven by the owner's awareness that it is time to leave the business -- with age, illness or domestic issues determining factors. Heinze says.

Heinze, whose name you've likely read in this column before, is half of Goldberg Heinze Business Advisors and all of Paul M. Heinze Co., Barrington Hills. Heinze and partner Joel Goldberg (G2G Strategies), primarily advise manufacturing companies, often helping the owners sell (or buy, as the case may be).

2019 Kendall Communications Inc. Follow Jim Kendall on LinkedIn and Twitter. Write him at Jim@kendallcom.com. Learn about Jim's skills at www.kendallcom.com.

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