Will implementing an Employee Share Ownership Plan (ESOP) mean I need to hand over control of my business? - Succession Plus

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Will implementing an Employee Share Ownership Plan (ESOP) mean I need to hand over control of my business?

FAQ

Will implementing an Employee Share Ownership Plan (ESOP) mean I need to hand over control of my business?

By , October 18, 2019
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An Employee Share Ownership Plan (ESOP) is a structure to allow employees to buy shares in the company they work for and are very popular in the USA and Europe. They are used as a method to attract, retain and motivate key employees.

In simple terms, an ESOP is a plan with an agreed set of rules to gradually sell or transfer equity ownership to employees within the company. These plans are becoming more common in Australia as a succession strategy and also as a productivity and engagement tool.

The Australian government introduced new rules in 2015 to encourage the use of ESOP’s in Small & Medium Enterprise (SME) including generous tax concessions.

Many employers raise concerns about using an ESOP and the “loss of control”, this is not the case and can be easily avoided as the plan is designed with appropriate corporate governance in place. The right structure will provide protection to all parties, governance of both the plan and the company and management control.

If my employees own equity, does that mean they have control?

You can own shares in BHP and not have any control over the business – the principle is the same. The ESOP rules govern the operation of the plan including control and the rules are designed to better align your interests (as a business owner) with theirs (as employees). The rules should ensure both parties are focused on improving the performance of the business and therefore building the equity value, whilst protecting all participants – the company, the employees and the founders.

You can use an ESOP to gradually handover control as you reduce your involvement in the business – but this is managed by you on your timeframe and is not legally required.

The academic research tells us that most employees do not want control or to run the business but they are very happy to own equity in the business they work for and work alongside founders to grow the business equity value.

Craig West

Craig West

Managing Director | Succession Plus

Craig West is a strategic accountant who has over 20 years’ experience advising business owners. His background as a CPA in public practice, provided invaluable experience in the key issues of concern to business owners. Following 6 years of study to gain two masters degrees, Craig focused on Capital Gains Tax (CGT) for business sales advising on strategic management of tax issues. This experience formed a very strong view that business owners (and often their advisers) were unprepared and unaware of the steps required to prepare a business for exit.

Craig now acts as a strategic mentor for mid-market business owners and has written four critically acclaimed books on employee incentives, succession planning, asset protection and exit strategies. Craig has conducted numerous seminars and keynote presentations throughout Australia & internationally, including adviser education programs for the Institute of Chartered Accountants and CPA Australia.