When speaking with business owners, the one piece of advice that I always give is “always have a plan”: whether it be a business plan for the business’ development and growth, a marketing plan for a sales campaign to ensure success, or an operational plan to define your practices to provide consistent quality products and services.  

Far too often, we do not plan for the end of the business lifecycle. According to NYC.gov, 83% of retirement-age small business owners in the United States lack a formal business exit strategy.  Additionally, of those who want to sell their business, most businesses do not sell when placed on the market. While in a future post I will discuss business dissolution, today I wanted to provide some insight into the ways in which business owners can move on from their business while still contributing to their communities and empowering their employees.  

Employee Stock Ownership Plan 

As a qualified retirement plan, an Employee Stock Ownership Plan or ESOP provides tax incentives to both the employees and the company. Like most qualified retirement plans, the participants are paid either at retirement or termination of employment. In an ESOP, the shares owned by the plan are held in a trust that is managed by the trustee(s), whose responsibility it is to act in the best interests of the plan participants. Publix, a large southeast grocery chain, is an example of an ESOP.  An ESOP can also provide tax benefits to the seller through the ability to defer capital gains tax during the sale of the business. Because of the complexity and cost associated with ESOPs, they are not usually recommended to small businesses.  

Employee Trust 

Similar to the ESOP, an employee trust provides allows a trust to operate on the behalf of the employees for a specific goal. An employee trust can be set up to preserve the legacy of the business or work to meet community or social goals. It also provides a level of simplicity in providing employee shares in a company. An employee trust also allows the business to get around a few of the restrictions that ESOPs have, like who can participate or how equity is allocated. Unlike an ESOP, the business-owner has the ability to set the goals of the trust so there is less risk of the business being sold or directed towards a purpose outside of the seller’s original goal. The company pays the employees profit shares in addition to their salaries.  The downsides to this level of flexibility are that employee trusts do not share the same tax benefits for the seller as an ESOP. 

Employee ownership is an option whereby a business is run entirely or in part by the individuals that work for the company. Research shows that employee-owned businesses perform better than their counterparts in pay, retirement savings, job retention and workplace satisfaction. Additionally, employee-owned firms are more productive and more likely than their counterparts to survive as a business. Here are some of the different types of employee ownership models and how they operate. 

Worker’s Cooperatives 

By far the simplest of the three, a worker’s cooperative is an employee ownership model where the employees own and operate the business. The benefit that workers cooperatives provide over the previous two is every employee has one vote and has a say in the election of the board of directors. For ESOPs or employee trusts, the extent of employee voting rights is determined by the company. For their ownership of the business, the employees receive annual dividends in addition to their salary.  

As you seek further understanding of how you might transition your business into an employee-owned business, I would suggest keeping in mind the following:  

– keeping the following information in mind now, well before you are at the stage of needing to retire or move on from your business.  

– Create a succession plan. Who do you work with now that could run the business? If possible, find multiple people that may be able to fill this role as a contingency. 

– Think about the ways to finance the transition of your business to your employees.  

In addition, for support and technical assistance creating and operating an employee owned business in Brooklyn, contact the Center for Family Life or NYC’s Owners to Owners initiative, they have great resources and support for your business. Having this information well in advance will allow you to make informed decisions about the longevity of your business.