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3 ways to know if an ESOP is right for your business

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3 ways to know if an ESOP is right for your business

By , December 18, 2019
esop right for your business?

You’ve heard of Employee Share Ownership Plans before, but how do you know if your business is the right fit for one?

In this article I’m going to help answer that question for you by going through three key ways to know if an ESOP is right for your business.

But first: what is an ESOP and how does it work?

An ESOP provides additional structure in your business, whereby employees are allocated profits over a predetermined benchmark.

Let’s say your profit was $1,000,000. What an ESOP would do is allocate say 20% or 30% to an employee share plan, so the share plan might end up with $200,000 or $300,000 in it for the year, and then that $200,000 or $300,000 is then used by the employee share plan to buy shares in the trading company. The employees don’t get the actual ownership of those shares until, let’s say for the sake of this example, five years later (which incentivises those key employees to stay with the business). But what they do get along the way is a share of the profit.

Point one in determining if an ESOP is right for you: the size of your business.

There’s a couple of stages you might think about in an employee share plan. One is its start-up. So generally in a start-up, there’s some highly specialised technical knowledge required, and you might use an employee share plan to provide an incentive for key employees to stay with a start-up business. The second stage that you might use a share plan is where you get to say half a million dollars worth of profit, and you really want to go for growth and scale the business up.

Point two in determining if an ESOP is right for you: do you have key staff you want to go the extra mile to retain?

If there’s key personnel in your business, one way of incentivising them to stay within your business structure is to set up a share plan so that these key staff are allocated some of the profit. When staff get that sense of ownership, they start thinking like business owners, which is really what you want your key employees to do.

Statistically speaking, employee share plan companies tend to have a retention rate for their employees roughly three times that of non-ESOP companies.

Employees who have a stake in the business through an ESOP think and act like business owners, which means they are more innovative, and are more likely to stay around for the life of the business.

Point three in determining if an ESOP is right for you: are you in growth mode?

You should only implement an ESOP if you are ready to grow and accelerate your business. Statistics show that profit improves by between 8% and 11% when you’ve got an ESOP in place because the employees that are in the ESOP have an ownership mindset, which means they’re involved, and they’re highly motivated and incentivised to increase revenue and decrease costs.

If you think an ESOP could be of value to your business, check out our webinar Which Employee Share Plan is right for your business? to start exploring the different options available.

Llew Eynon

Llew Eynon

Partner - Western Australia | Succession Plus

Llew is a Partner as well as Director at his Perth-based accounting firm LG Accounting Solutions, which he has been running for 20 years. He serves mostly medium-sized businesses by working with them to implement effective systems as well as solutions to cash flow problems. Llew values relationships because he has found that if you want to support a business and inspire it towards its next level of success, you have to build strong relationships with key people in that business.