This is a popular question in the ESOP community and there are a number of answers. Some suggest the number of ESOPs is growing but the number of terminated ESOPs each year keeps the number steady, so while there is growth, there are enough terminations to keep everything in check. Others believe the growth has stagnated and that numbers have dropped slightly.
In 2007, there were a number of news articles about newly created ESOPs and positive articles in trade publications about the pros and cons of being employee owned. However, the inevitable questions is always asked, why aren’t there more?
There are several popular theories on why more ESOPs are not created each year:
· Time involved in setting up the ESOP
· Feasibility study is expensive
· Ongoing administration costs are expensive
· A current owner may get more money if the company is sold outright as opposed to selling to the employees
· There is a loss of perceived control for the owner which leads to the theory of a psychological barrier to sharing information and ownership with employees
There are numerous reasons floating around out there and we want to hear them. Why do you think there are not more ESOPs?
Last November I started a similar discussion in a blog post titled “Why the Number of ESOPs is not Growing at a Faster Rate”. The post is located at http://www.onestopesopblog.com/2007/11/why-number-of-esops-is-not-growing-at.html
In addition to some of the reasons mentioned in your post, I discussed the following reasons for ESOPs not growing at a faster rate:
• Many companies and professional advisors are unaware of the benefits of ESOPs
• Many professional advisors without ESOP expertise will lean towards business transition alternatives that allow them to share their expertise and receive compensation for it
• Many companies are not performing any type of succession planning and other business transition alternatives are being implemented as a result
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2. Evan L. Rhodes said...
I have evidence to support the statement, “Many professional advisors without ESOP expertise will lean towards business transition alternatives that allow them to share their expertise and receive compensation for it.”
I recently met with a prospective client who shared a memo from their attorney discouraging ESOPs. After describing several “viable” exit alternatives, here is what the memo had to say about the ESOP:
“…although the ESOP is an option, it is likely not a very good option for the corporation at this time. The administrative expense and ongoing responsibility significantly outweighs the benefit to you in accomplishing your desired return. You will not only fail to achieve your desired goal…but you will likely look back and wish you had never set up the ESOP.”
I think this is a classic illustration of how business advisors approach the ESOP concept and might explain why there are still so few of them.
4/22/2008