An economic crisis could be the right time to start an ESOP

While many businesses deferred thinking about implementing a shared ownership plan back in April, now may just be the right time to start taking action. Businesses have adapted and started to see the beginning signs of operations picking up again.

There are around 7,000 ESOPs in the US according to Mary Joseph’s article in Forbes (2020). A Deloitte (2018) found that about three quarters of publicly traded companies offer ESPPs (Employee Stock Purchase Plan). However, we want to see Canadian plans continue to rise. A plan can be set up many ways driven by the goals of the owner, the company, and the participants.

Joseph outlined some reasons why an ESOP should be implemented. In this blog we will use her concepts to similarly highlight some reasons but from a Canadian perspective.

  1. Company Performance – The most compelling purpose for a time like this is that ESOPs outperform non esop companies during tough times. This is seen in studies comparing companies’ sales, profits, hiring activities, etc. For example, the researchers at the Institute for the Study of Employee Ownership and Profit Sharing at Rutgers University found that ESOP companies grew sales during 2008-09 11.1% while non-employee-owned companies grew by just 0.61%.
  2. An Ownership Mindset – Employees are also owners and they have a different mindset toward their company and how it works compared to non-employee owners. Think about a renter of a building versus an owner. Employees think about things like their paycheck, Fridays, time off, or the “me mentality”. Owners think of things like sales, profit, expenses, clients, company projects, cash flow, etc. or the “us mentality”. Employee owners understand the bigger picture and are likely to find ways to boost sales and/or cut costs more so than if they were not an owner. When the company does well, everyone individually does well too. As a customer would you prefer to deal with the owner or someone who doesn’t have that level of stake in the company’s success? Usually the owner will be the one giving the best service. When all your employees are also owners client satisfaction soars. Research from the NCEO shows that employees at ESOP companies are less likely to be laid off. Recent research from Rutgers University (2018) also indicates that retirement accounts of employees at ESOP companies are significantly greater than those at non-ESOP companies.
  3. Successful Exit for the Founding Owner – It makes sense for the founding owner because sale to a third party is only successful about 50% of the time. Selling to your employees on the other hand has an 80% success rate. Why is this you may wonder? For a small or medium sized private Canadian company, third party offers may be hard to come by, and when they do they may not meet the expectations of the owner in terms of what the company is worth and what will happen to the company once the deal is done. Many of our clients want to share the success that their employees have helped create and continue the legacy of their business. The employees are already invested by way of the time and effort they have committed over the years, they are more likely to want to see the business succeed. Not to mention they already know their jobs, know how the company works, and know the clients. Additionally, the owner doesn’t have to share extensive financial and confidential information with a third party. The fact that it is also a lucrative and effective way for an owner to exit is an added bonus.
  4. Flexible Transition – Control can still rest with the founding owner until such time that they are ready to fully transition controlling ownership. Employee owners are not typically provided a seat on the board until they hold a significant ownership percentage. See our last blog post which talks about participation and what that can look like.

Overall, it is a win for all, the founding owners, the employees, and the economy. An added bonus is that it can support democracy by strengthening the wealth of the middle class without government intervention.

By Joanna Phillips, CHRL, CVB, Vice President, and Perry Phillips CPA, CA, CBV, President


The magic ingredient for creating a successful ESOP

ESOPs, participative management

Employee ownership works. It makes companies, on average, better, faster, and stronger. The typical employee-owner stays with his or her company longer, and many of them come up with the kinds of creative ideas that can push expenses lower than managers thought possible, or that open up new lines of business. Overall, the statistics show that, on average, everyone comes out ahead with employee ownership.

Not surprisingly, some companies do far better than their peers, and some employee-owned businesses do not get any performance benefit at all, or may even do worse. 

What separates the companies that outperform from the ones that underperform?

A successful ESOP requires open communication. The Plan itself creates the conditions for company success, however strong communication and participation make the plan successful long-term in order to experience the benefits everyone expects. 

Employee ownership

Studies have shown that participative ESOPs that are fully and clearly communicated enhance employee engagement (rather than their desire to control the company) leading to high productivity, increased profits, and increased wealth for all. 

If people are going to think and act like owners, they need a basic level of understanding of the plan through which they have that ownership. Here are some of the methods our clients have used to communicate an understanding of their ESOP to their employee-owners.

Hold meetings: Bring everyone together in large groups to announce the ESOP and to cover some of the most common questions about the plan. Do not go into great detail just yet. 

Set up a peer-to-peer training group to further communicate the ESOP in small groups. People can be elected or invited to join a training group and given the time and resources to create a training program. The most successful groups have the active support of the CFO, who can make sure that they have accurate information and can answer all of the group’s questions. These communication groups may even talk with similar committees at other companies so they can share PowerPoint slides, handouts, and agenda items.

Have written materials: Provide information about the ESOP in written format for the people who need to see things in black and white. Employees’ spouses can read them as well.

Let the ESOP sell itself: Most employee ownership plans are good deals for the employees. If they trust the information they receive, rather than suspecting it of being sugar-coating or emphasizing only the positive, they will likely come to their own conclusion that the plan is a good thing. 

Target “just in time” information: People learn best when the learning is digestible and repeated. Young employees who have just joined the company do not need to know all the details about the timeline on which they will be paid out when they leave the company, but they probably do want to know the eligibility rules.

Share stories: Not much is as persuasive to human beings as stories. Talk about people who have retired from your company with substantial value in their ESOP accounts, or, if your plan is newer, use examples from other employee-owned companies. Tell the story of why your company became employee-owned. What were the other options? Why did the company choose employee-ownership over those other options?

Use statistics: Some people prefer to see the numbers, so don’t hesitate to show them research—but only the highlights– on the implications of employee ownership for employee-owners, your company and ultimately the community. Good sources of data, even though most are from American companies, are the National Center for Employee Ownership (NCEO), the ESOP Association (US) and the ESOP Association Canada.


The Case for an ESOP as an Attraction and Retention Tool

The shut-down of the economy has lasted for almost 2 months and businesses are either facing negative impacts from the COVID-19 crisis, along with most Canadian businesses, or are among the minority of businesses experiencing positive impacts.

It’s likely that very difficult business decisions have had to be made to ensure your company’s existence through the crisis. Part of the challenge is having to lay off valued employees, and maintain a positive culture.

Although things are still changing rapidly, business owners are likely considering long-term impacts on the company’s ability to retain their employees, but also to attract top talent once the crisis is behind us. The many reasons why owners turn to an ESOP (Employee Share Ownership Plan) include to exit the business, to establish a succession plan, and especially to attract and retain the top talent in the industry. In some sectors ESOPs are de rigueur and companies cannot be without one. Rather than turning away from investing in your business growth now, this may be exactly the right time to take opportunities to work on your business rather than simply in it.

As your company grows and time goes on, your workforce demographics naturally become younger. It certainly seems that ESOPs appeal greatly to Millennial workers who are looking for something more out of their companies. More studies are confirming this as more millennials enter the workforce. Every business owner knows how much time it can take to put together the “perfect” team. Additionally, employees overall are not staying in one job, or one company, for long compared to in the past. For these reasons, an ESOP can be a very strategic and valuable tool to attract and retain your team which you have invested in and worked hard to establish. Many studies of ESOPs in the US conducted by the NCEO indicate that ESOP companies have a greater resilience for staying in business through economic downturns. While the current crisis is unprecedented, these studies do suggest companies who have a participative ESOP will be more likely to come out of the crisis and emerge in a relatively strong position.

In ESOP Builders’ ESOPs as an Attraction and Retention Tool (November 2019) survey of Canadian ESOP companies 75 percent of respondents indicated their ESOP offers an edge on the competition to attract and retain talent. Therefore, it is likely that taking these steps will set your company up for success against your competition by ensuring you have the team to bounce back incredibly strong once the country experiences a positive shift in the economy.

By Joanna Phillips, CHRL, CVB, Vice President, ESOP Builders Inc.


Employee Share Ownership Plans from the Owner’s Perspective

Most owners of privately-held companies are also the founders.  Why?  At some point in the past, they had a dream and a desire to own their own business.  For many, this required giving up a secure job working for someone else and entering the uncertain and ambiguous realm of an entrepreneur.  Although there was a huge risk, they believed in themselves and their dream, and they took the leap.  For many, this required using their own savings, as well as putting their house and everything they owned on the line as collateral.  This was not an easy decision on their part.

Continue reading


How Does an ESOP Fit for the Millennial Generation?

Canadians born between 1979 and 2000 now outnumber baby boomers for the first time in history.  The Millennials (or Generation Y) form a distinctive segment of the work force, aged 16 to 37 years old.  There are two types of Millennials:  those aged 16 to 27 have been called the iGeneration Millennials since they were raised with iPads; while those aged 28 to 37 are called the Net Generation Millennials as they were brought up on the internet.

Continue reading


How Does a Management Buyout Relate to an ESOP?

A “management buyout” is a buzz phrase currently used in many business discussions, and for good reason.

The greatest generation of entrepreneurs in Canadian history will retire within the next 10 to 15 years, and these men and women are looking for a way to exit their companies in a way that meets their needs.  Not only do they want to leave with an abundance of retirement funds, they also want to leave a legacy.  They want to ensure the business they built and nurtured will thrive and continue to support the employees and enhance the community.

Continue reading


Postal Strike Looming – Is There a Better Way?

Admittedly, the business of Canada Post has changed dramatically in recent years, which is contributing to the looming postal strike.

Moving away from paper-based communication and transactions has slowed the flow of business to Canada’s Postal Service. As consumers we have seen increased rates and cancelled home delivery as two public facing ways the public corporation has tried to make its business model make sense.

Continue reading