the case for employee ownership

Over the last five decades, there has been a rampant consolidation of a number of industries and a rapid growth in private equity transactions in the United States. These forces, among others, have dramatically shifted corporate ownership away from local communities and into the hands of fewer and fewer distant parties. Naturally, this has resulted in a corporate ownership class that is less vested in the communities where their capital is deployed and less concerned about the long-term prospects of the company and its employees. ESOPs offer owners of capital a competitive alternative for the succession of corporate ownership - an alternative that keeps capital in the hands of the communities and families that developed it.

ESOPs are non-government vehicles that help all members of society gain access to capital and wealth creation opportunities that are typically only within reach of the capital class.

Given the impending social security crisis and growing wealth gap, we need mechanisms that promote capital ownership for wealth creation and preservation for all. The percentage of households that own stock in the U.S. has declined over the last five decades. Now, the majority of households in the United States do not own any stock (the top 10% of Americans own almost 90% of the stock).  Employee ownership is a way to reverse this trend by addressing wealth inequality via economic, rather than political means. Currently, ESOP participants have 2.5x the retirement assets of employees in non-ESOP companies.

Numerous studies over the last five decades have demonstrated that ESOP-owned companies repeatedly outperform their peers. They have higher sales growth, higher employee growth/retention, and lower loan default rates. This is due both to the tax advantages ESOPs enjoy and the unique “community ownership” culture ESOPs create.        

While ESOPs have certainly flourished, they continue to suffer from one major problem: inadequate capital sources to provide cash at close to exiting shareholders. Most ESOP formations are leveraged transactions, which often need to stretch beyond what senior bank loans can provide. Given the smaller size and private nature of most companies considering ESOPs, there is a limited amount of mezzanine financing available. ESOPs are also often new and confusing to most traditional mezzanine lenders. In many cases, existing shareholders are forced to take back “seller financing” for the vast majority of the ESOP acquisition consideration. This reduces the amount of cash available at closing to selling shareholders and lowers the attractiveness of ESOP formations.

Through the tax advantages ESOPs provide, a seller could receive the same amount of cash at close as they would from a strategic or financial buyer, yet retain the mission, culture, and social impact of the company indefinitely. This can be true even when selling 100% of the company stock.