All posts in Wealth Management

ESOPs and Divorce

So, you’re facing a divorce – something you never thought you’d have to deal with. It seems you’re spending more time in meetings with lawyers than you are sleeping these days. It’s all so complicated.  Trying to equally divide out community property and accumulated marital investments is incredibly difficult – especially when there is a privately-owned business involved comprising a large portion of the value of the community property.

What do you do when one spouse wants to remain at the helm of the business and the other wants to be cashed out of their share?  Sometimes there just isn’t enough liquid capital for an off-the-cuff buyout.  In that case, what’s the solution?

It can seem to be an unsolvable problem when the divorcing spouses cannot come to an equitable decision.  Selling half of the business usually is not an option, but at the same time, you can’t take blood from a stone.  You just don’t have the cash for a buyout that would allow a clean parting of the ways.

Is there a compromise that can work for both parties?

The answer, thankfully, is yes.

An Employee Stock Ownership Plan might be the perfect solution.  There are definite benefits to considering an ESOP in spousal asset division.  From a business perspective, choosing this option can provide significant bonuses for both parties.  It is a flexible answer to a challenging problem.

To find out more about how an ESOP can help you with dividing your marital business assets equitably, check out our blog at


Looking forward to retirement, but not sure what to do with the business?

As much as you love your businesses, you must admit that retirement is an attractive idea. You dream of relaxed mornings sipping coffee by a roaring fire or leisurely reading the newspaper on a sunny day with nothing calling us to abandon your leisure and get to work.

It can happen.  For many of us, it will happen soon.  But before we can fade into the glorious sunset of retirement, we have a job to get done.

We have to deal with the next step – what to do with the business.

Maybe you can’t yet imagine your business without you at the helm.  It’s definitely hard to do.  You’ve invested your life in the development of this entity.  But whether you have five years or fifteen years before retirement, it’s important to start putting processes in place to ease the transition from a corporation you are 100% hands on with to a business that will become the responsibility of your successors going forward.

You need to start developing your exit plan.

No two businesses are exactly the same, and the design of your exit strategy will be as unique as the service that you provide.  Here are four simple business succession concepts to consider in preparing your retirement plan.



ESOPs Make Very Good Business Sense

It has been common knowledge for quite some time that ESOPs (Employee Stock Ownership Plans) make very good business sense. This statement is backed up by research.  Study after study has shown that businesses which are employee owned usually have a definite advantage over those that are not.

ESOPs are essentially retirement plans in which a trust that forms the legal structure of an ESOP purchases employer stock of the company sponsoring the ESOP. Most ESOPs are leveraged, which means that the ESOP is allowed to borrow money to finance its purchase of employer stock.  Loan payments made by the ESOP are funded through employer contributions to the ESOP, much like a company would contribute to a 401(k) or profit-sharing plan.

Let’s took a quick look at recent major research on ESOPs since they first were conceptualized and implemented by Louis Kelso in 1956:

National Center for Employee Ownership (NCEO) Study, 1986

A first look at how employee ownership impacts corporate performance, this study by Michael Quarrey and Corey Rosen of the NCEO tracked company performance for a period five years before and five years after the creation of an ESOP.  The key findings:

  • ESOP companies had annual sales growth rates that were 3.4% higher and annual employment growth rates 3.8% higher in their post-ESOP periods than would have been expected based on pre-ESOP performances.

U.S. General Accounting Office (GAO) Study, 1987

Another “before and after” look at employee-owned firms, the GAO survey was a bit controversial because of an assumption in its research methodology.  However, its conclusions again pointed favorably towards the net benefits of ESOPs:

  • An ownership culture is key to increased productivity in an ESOP company.  Participatively managed employee-owned firms increased their annual productivity growth rate by 52%.  For example, what would have been a 10% annual growth rate became a 15% growth rate in an ESOP company in which there existed a strong ownership culture, i.e. one in which a broad base of employees feel empowered as co-owners.

Washington State Department of Community, Trade, and Economic Development/University of Washington Study, 1998

Peter Kardas, Jim Keogh, and Adria Scharf found that substituting stock for wages or benefits can have a very positive impact.  Their study found that employees are significantly better compensated in ESOP companies than are employees in comparable non-ESOP companies.  The key findings:

  • The median hourly wage in the ESOP firms was 5% to 12% higher than the median hourly wage in the comparison companies.
  • The average value of all retirement benefits in ESOP companies was equal to $32,213, with an average value in the comparison companies of only about $12,735.
  • The average corporate contribution per employee per year was between 9.6% and 10.8% of annual pay, depending on how it is measured. In non-ESOP companies, this measure was only between 2.8% and 3.0%.

Rutgers University Study, 2000

One of the most significant studies to date on ESOPs, the Rutgers study looked at the performance of ESOPs in closely held companies.  The researchers, Douglas Kruse and Joseph Blasi, looked at sales, employment, and sales per employee for ESOP firms and comparable non-ESOP firms.  The key findings:

  • ESOPs increase sales, employment, and sales per employee by about 2.3% to 2.4% per year over what would have been expected without an ESOP.
  • ESOP companies were also somewhat more likely to be in business several years later.

Brent Kramer Study, 2008

Brent Kramer’s study, “Employee Ownership and Participation Effects on Firm Outcomes,” pointed again to the positive impact of employee ownership.  Matching 328 majority ESOP-owned companies to 328 non-ESOP companies of similar sizes and from similar industries, Kramer found that:

  • ESOPs had sales per employee that were 8.8% greater than in the comparable non-ESOP companies.

Alex Brill Study, 2012

A former advisor to the Simpson-Bowles deficit reduction commission, Alex Brill analyzed the ten-year performance of S-Corporation ESOP companies.  His assessment indicates that ESOPs clearly increase employment opportunities.  The key findings:

  • S-ESOP companies showed substantially more employment growth in the pre-2008 recession period than non-ESOP businesses.
  • S-ESOP companies regained momentum faster than other private firms after the recession.
  • S-ESOP companies in the manufacturing sector particularly benefited from the S-ESOP business structure, which buffered manufacturers through the recent, especially challenging economic times.

These studies provide a drum beat of evidence that ESOPs make very good business sense.  Most well-managed employee-owned companies, those which allow their employees an active role in the firm, realize higher sales and profit levels, are more productive, and create more widespread wealth than comparable non-employee-owned companies.

Information contained in this blog came from the NCEO, ESCA, and The ESOP Association.