Statistics Indicate that ESOPs Provide a Higher Rate of Return

In another blog post by Acclaro, we looked at why ESOPs (employee stock ownership plans) make very good business sense.  Today’s post provides an addendum and explores why ESOPs provide a higher rate of return to employees than do other retirement plans.

There has been much written lately about how ESOP companies have fared better during the latest recessionary period than their comparable non-ESOP counterparts.  A recent study published by Douglas Kruse and Joseph Blasi of Rutgers University found that ESOPs increase sales, employment, and sales per employee by approximately 2.3% to 2.4% per year over what would have been expected absent an ESOP.  In addition, Kruse and Blasi found that ESOP companies were somewhat more likely to still be in business several years later and were much more likely to offer other kinds of retirement plans.  This last finding flies in the face of conventional wisdom held by economists through the years that ESOPs must be a tradeoff for other wages or benefits.  That is, it is commonly assumed that they must be a substitution for other retirement plans or employee benefits.  Kruse and Blasi found that the introduction of an ESOP into a company was an overall net addition, not a substitution, to the company’s employee benefits offerings.

Another recent study also highlighted the attractiveness of an ESOP as a retirement plan.  The U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) compiled statistics in 2012 on 401(k)s and other retirement plans and found that ESOPs provided higher aggregate rates of return than 401(k) plans.  EBSA took a look at retirement plans with 100 or more participants from 1996 to 2010 and found that ESOPs provided, on average, a 12.9% higher return to an employee’s overall retirement plan than 401(k) plans.

As good as the results are in the various studies conducted in the last 10 years which point to the “ESOP advantage,” the performance metrics gleaned from the studies really get a bounce when an ESOP company puts particular stress on participative management.  In other words, performance results for ESOP companies which actively encourage management participation by its employee-owners are superior to the operating results of those ESOP companies where management participation is not encouraged.   Specifically, employee influences on new products, work design, and marketing were strongly correlated to performance outcomes such as total sales and earnings.  In other words, as employees became more directly involved with decisions regarding the details of work design, the design and implementation of new products and marketing campaigns, company performance improved.

This point is corroborated by another study, published by the Great Place to Work Institute which conducts the annual “100 Best Companies to Work For in America” competition, which showed that an ESOP alone has a very limited impact on the sponsor company’s financial performance (as measured by the Return on Assets ratio) but, when combined with high employee engagement (participative management) scores, an ESOP has a significant impact on a Company’s total sales and earnings.

The research by the Department of Labor shows that ESOPs have provided a higher rate of return to employee-owners than have 401(k) plans.  Not only do ESOPs make great business sense, but they can prove to be a great retirement investment, as well.

Information contained in this blog came from the NCEO and the DOL (table E23).


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.


How to Identify Prospective ESOP Situations for Ownership Transition


In today’s corporate and tax environment, successful ownership transition can sometimes be perplexing.  While many alternatives are available to accomplish this ownership transition objective, only a few alternatives are appropriate for any given set of circumstances.  The options typically include an initial public offering, a management buyout, a recapitalization, a sale to a third party, a sale to an employee stock ownership plan (ESOP), a joint venture, and others.

This blog post will discuss in detail one option, the leveraged ESOP, which is a powerful tool for accomplishing a successful transfer of ownership.  The benefits of an ESOP ownership transition include deferring capital gains taxes to the selling stockholder, the tax deductibility of principal payments on ESOP debt, low interest financing on certain transactions, possible improved employee productivity, and the opportunity to maintain operational control through employee ownership.

The following discussion summarizes the attributes a prospective ESOP company should have in order to best utilize the advantages of an ESOP for succession planning.

Diversification Desired by Owner

Diversification is important for all investors, but is particularly crucial for stockholders nearing retirement age.  For business owners whose major personal asset is their stock in a closely held company, an ESOP provides a valuable diversification vehicle.  The proceeds from the sale of stock to an ESOP can be reinvested in a diversified portfolio of securities with favorable tax benefits (discussed later), providing lower risk for an equivalent expected return on the owner’s investment in the current business.

Continuity of Business Ownership

ESOPs can provide continuity of ownership and control since the ESOP trustee is typically a passive, financial stockholder whose objective is closely aligned with the success of the business.  Therefore, if the stockholder sells less than a 50% ownership interest, then effective operational control remains with those best qualified to manage the business.  Also, owners can reward past and future employee efforts through employee ownership.

Alignment of Employee/Stockholder Interests

Because an ESOP provides for the allocation of stock.  Employees who are owners are more likely to be concerned with the business’s profitability and productivity, which are typically stockholder concerns, than are employees who are not owners.  Research has shown that ESOP companies are more efficient, productive, and profitable than their non-ESOP competitors.

Consistent Management

A strong management team should be in place to handle succession if the owner/manager is leaving.  Some financial institutions may require employment contracts or non-compete agreements with key executives in leveraged ESOP transactions.

Size of the Business

Businesses with larger revenues and/or substantial assets are often better candidates for leveraged ESOPs because larger businesses can attract more favorable financing and typically have a lower cost of debt.  In addition, transaction costs as a percentage of proceeds are relatively lower for larger businesses.

Manufacturing companies have a larger investment in fixed assets that can be used to collateralize loans.  Service businesses should have earnings and cash flows that are strong enough to support an ESOP loan.  To enhance the ESOP debt collateral, selling stockholders may have to pledge a portion of the transaction proceeds to the bank, although the pledge can be limited in both amount and duration.

The most efficient minimum size of an ESOP loan is typically $2 to $5 million, with a $1 million transaction generally considered the smallest transaction size for an ESOP.  For smaller transactions to be successfully completed, the transaction structure should remain simple in order to reduce transaction costs.

Debt-Carrying Capacity

The business must be capable of generating adequate cash flow to satisfy the debt service requirements of the ESOP and any other interest-bearing debt.  Businesses with lower debt-to-equity ratios can take on more leverage in the form of ESOP financing.  Therefore, it is generally more difficult to finance an ESOP in capital-intensive businesses that typically have larger debt loads.  The business with low debt-to-equity ratios should have established a significant banking relationship with a financial institution in order to facilitate the ESOP financing.  While the existing debt level may be a constraint in the leverage of the ESOP, this drawback may be minimized because the ESOP-related income tax benefits and possible improved employee productivity can enhance the business’s debt-carrying capacity.

Seller’s Low Tax Basis in Company Stock

Individual owners that sell to an ESOP and reinvest the proceeds in qualified replacement securities (i.e., any domestic corporate stocks or bonds) can defer recognition of a capital gain if the ESOP owns at least 30% of the employer company immediately after the sale.  The deferred capital gains tax benefits are especially valuable to owners who would otherwise recognize a significant capital gain because of to a low tax basis in their stock.

Large Payroll Base

In cases where a significant percentage of a business is sold to an ESOP, a large payroll base allows the business to repay the principal on the ESOP debt with tax-deductible contributions.  However, there is a limit on the amount of employer contributions that are tax deductible.  If this limit is expected to be exceeded, the preferred securities can be sold to the ESOP.  Because of the tax deductibility of dividends on ESOP-owned preferred stock, the ESOP debt principal payments remain fully deductible.


This blog post is designed to assist those considering a leveraged ESOP acquisition with the appropriate strategy to pursue, based on all of the facts and circumstances surrounding each specific ownership transaction situation.  While there are many circumstances when an ESOP fits the financial and cultural aspects of a business’s operations, it is important for business owners to keep in mind all the implications of becoming an ESOP-owned company.

Please contact Acclaro if you have any questions regarding the valuation of employer securities for ESOP purposes.


That Age-Old Question: Is an ESOP Right for Me?

That Age-Old Question: Is an ESOP Right for Me?

To sell to an ESOP or not sell to an ESOP, that is the question.  And the answer lies within an expertly prepared feasibility study.  While ESOPs are a fantastic tool for exiting business owners, it is not a one-size-fits-all solution.  Whether it’s for an initial sale to the ESOP or for a subsequent sale to an existing plan, an ESOP is best utilized when its installation is based on sound decisions after thorough and thoughtful research.

R.K. Schaaf Associates, Inc. (RKS) was founded in 1975 by Rainer K. Schaaf primarily to provide ESOP sponsors with a third party recordkeeping firm that focuses on the unique nuances relating to these plans.  Although Mr. Schaaf has since retired, RKS continues to focus on the technical and operational aspects of ESOPs.  Our staff is dedicated to providing our clients with all the information they need to make informed decisions – including the decision that an ESOP may not be right for them.

RKS can help companies determine whether an ESOP is feasible by preparing an insightful examination of the impact of the proposed transaction on the company, its employees, and the ESOP.  Corporate structure, demographics and exit strategy all need to be “put under the microscope” so to speak before implementing an ESOP.  RKS will prepare a Feasibility Study tailored specifically to address a client’s needs, and offers three different levels of study to accommodate those needs, one of which provides a side-by-side comparison of an ESOP versus other major liquidity or corporate financing alternatives, including a private auction, negotiated sale, debt-recapitalization, or liquidation.

In summary, the most important step the company can take before implementing an ESOP is to analyze whether the plan would be feasible.  Once an analysis is completed and it is determined an ESOP is feasible, a company is likely to experience many years of enhanced employee productivity, less turnover and a greater bottom line.  The horror stories you may hear about ESOPs are usually a direct result of poor planning and research in the initial stages.  Our goal is to make sure that companies thoroughly plan for their ESOP so that it will be a success story.


For more information about R.K. Schaaf Associates, Inc., visit our website at or at  For more information about our feasibility studies, contact Wendy Lankes at (800) 678-8337 or


R.K. Schaaf Offers Free Online Financial Tools

R.K. Schaaf Offers Free Online Financial Tools

R.K. Schaaf Associates, a financial services firm with over 3 decades’ worth of experience in ESOP administration and other services, offers a number of free financial tools on its website for the benefit of current and prospective clients.

One of the tools is a handy loan calculator which allows a visitor to quickly calculate participant loan amortization. A participant loan is subject to a number of requirements that, if broken, can lead to serious tax consequences, such as potentially significant excise taxes. In some cases, the entire benefits plan could be disqualified as a result of an improper participant loan. The calculator allows you to determine whether your loans meet IRS requirements.

R.K. Schaaf is represented on ESOP Marketplace by a number of its expert ESOP advisors.


First Bankers Helps Small Business Owners – Testimonials

First Bankers Helps Small Business Owners – Testimonials

First Bankers Trust Company is a bank holding company whose primary mission is to help local community businesses and organizations meet financing needs. First Bankers is represented on ESOP Marketplace via a number of its ESOP advisors who offer employee-owned companies expert guidance when it comes to succession planning, governance and more.

The First Bankers website features a number of testimonials from small business owners who have benefited from an ongoing business relationship with the company. One of these tells the story of a burgeoning pet grooming business in Rushville, Illinois. The owner has had a relationship with First Bankers since 2009, when she took out a home mortgage; when it came time to open a business, First Bankers was there for her with a business loan and expert advice that helped her through the first difficult stages of setting up a business.

Read the rest of the story on the First Bankers website, and check out ESOP Marketplace listings to see how First Bankers ESOP advisors can help your business as well!


Katten Partner Discusses Evaluation of Takeover Bids

Katten Partner Discusses Evaluation of Takeover Bids

Katten Muchin Rosenman LLP, a full-service law firm represented on ESOP Marketplace through a number of its partners who specialize in matters of ESOP law, has demonstrated an effective wide spectrum approach in providing high-value legal advice for numerous industries.

Recently, Katten partner and co-chair of the Mergers and Acquisitions practice Jeffrey Patt gave an interview to Law360 where he discussed the challenges of evaluating competing takeover bids when they involve components that cannot be easily compared, such as a cash and stock mix. He offered advice to boards that are facing such difficult choices, recommending a patient approach and in-depth comparative studies.

The original interview is hosted on the Law360 website and requires a subscription to access.


PTCFO’s Strategic Planning Workbook For Family Owned Businesses

PTCFO’s Strategic Planning Workbook For Family Owned Businesses

PTCFO Inc., the company created and headed by ESOP Marketplace founder Jack Veale, has a mission of helping closely held and family businesses engage in sound strategic planning and management. Many non-profits and ESOP companies have benefited from PTCFO’s sound advice.

In addition to providing advisor services, Jack Veale has also compiled his expertise into a basic action plan handbook titled “Creating Strategic Innovation.” This workbook is intended to help closely held and family owned businesses develop internal leadership and problem-solving skills in order to improve efficiency and profitability.

The handbook explains principles of business problem solving to workers and management in a clear and comprehensible way, as well as helping reinforce the knowledge through team-building exercises and activities. If you’re the owner of a family business who would like to improve management practices and strategic planning, “Creating Strategic Innovation” will be of great help to you in this task.


Murray Securus Wins 2nd Place in ESOP Communication

Murray Securus Wins 2nd Place in ESOP Communication

Murray Securus, formed in 2012 after the merger of Murray Risk Management and Insurance and The Securus Group, provides business solutions and advisor services in areas such as employee benefits, third-party administration, wealth management, risk and insurance.

Murray Securus not only provides ESOP advice, but is itself an employee-owned company; it made an entry for the Annual Awards for Communications Excellence at the 2013 meeting of the ESOP Association, and was honored with second place in the category of all U.S. businesses with fewer than 250 employees.

Being recognized as having the second-best implementation of ESOP communication in the country is the result of Murray’s dedication to practicing its effective approach internally as well as helping its ESOP company clients improve their practices.


Acclaro Team Members Present at NCEO Conference

Acclaro Team Members Present at NCEO Conference

Acclaro Valuation Advisors is an leader in business interest and closely-held business valuation services. The company specializes in initial ESOP valuation as well as annual ESOP valuation reports; due to their experience in the field, Acclaro ESOP valuation advisors are sought speakers on employee ownership topics.

In April 2013, members of the Acclaro team attended and made presentations at the annual National Center for Employee Ownership conference. Aaron Pryor moderated a roundtable discussion at an experts’ luncheon, and Chris Best served as a co-presenter of a presentation on ESOP exit planning.

We are proud of our members’ involvement in the ESOP community and look forward to continued engagement in ESOP education and innovation.