ROSEMONT, Ill.--(BUSINESS WIRE)--Employee stock ownership plans (ESOPs) encourage employees to act in the best interest of shareholders, since the employees themselves are the shareholders. Looking back at a highly successful 2017, Therese Fauerbach, co-founding owner of The Northridge Group, a Rosemont-based consulting firm, couldn’t be happier with her decision to convert the firm into an ESOP, effectively putting the firm’s future in the trusted hands of the employees who helped her grow the business into the thriving firm it is today.
An ESOP is a tax qualified defined contribution benefit plan that provides a means for selling a business that benefits the company, employees, and the selling business owner. Business owners sell their shares to an ESOP trust, and over time those shares are allocated to employees’ accounts within the trust, making them employee-owners.
According to Fauerbach, “Every business owner needs an “exit strategy” to ensure their business will continue to thrive after they retire. In my case, I knew that selling the business to the employees - people who I know and trust to continue the mission of the Northridge brand - was the right decision.” While she is not ready to retire yet, she started the ESOP process in 2016 and is already seeing benefits for Northridge’s business, its employees and its clients.
There are three primary benefits to a company becoming an ESOP:
1. Continuity of leadership. Selling the business to a third party, often results in the third party putting their leadership in charge. The Northridge leadership is strong, talented and committed to Northridge. Fauerbach considers their continued leadership a huge benefit.
2. The existence of an ESOP is a great tool for retaining and acquiring new talent.
3. Federal regulations provide tax benefits to the firm.
Fauerbach points out that Northridge’s clients have also benefitted. While Northridge has always provided exceptional service to its clients, there is now an added incentive for employees to do their very best for clients since client success results in Northridge success, which results in financial gains for Northridge’s employee-owners.
Employee-owners of ESOP companies reap significant financial rewards such as secure jobs and meaningful retirement benefits. According to the National Center for Employee Ownership (NCEO), ESOP companies:
- Are 25% more likely to stay in business
- Were 4 times less likely to have employees laid off in the last recession
- Drove an average of 4-5% productivity improvements in their first year as an ESOP
“I believe that increased employee engagement is a natural outcome of becoming an ESOP company,” says Fauerbach. “I absolutely see a more energized and creative level of engagement among employees and I’m excited to see what the future holds.”
A growing number of companies are finding that becoming an ESOP is a practical decision that benefits all key stakeholders. While it does necessitate advanced planning, the required foresight can be well worth the effort.