A Century of Evolution
From Stock Bonus Plans to America's Most Powerful Exit Tool
The Beginning
In 1926, the IRS authorized stock bonus plans. Early plan companies included Sears, JCPenney and Proctor & Gamble. Thirty years later, the IRS allowed stock bonus plans to borrow funds to purchase company stock.
With this ruling, Peninsula Newspapers created the very first IRS qualified ESOP. Within the next decade, only about two dozen were in force; but in the three-year period 1968–1971, about 50 ESOPs were created.
In 1974, Big News Came Down.
On September 2, Congress passed ERISA (the Employee Retirement Income Security Act). The financial markets were in limbo; there was a dearth of venture capital, and no mergers or acquisitions. Small businesses found it difficult, if not impossible, to borrow money. The economy was stagnant.
Congress was quick to endorse ESOPs to minimize taxes for smaller, struggling companies, to slow inflation (employees accepted less pay in return for equity), to motivate employees and increase productivity, to generate capital, and to prevent some unionization and cut the frequency of strikes.
A Lawmaking Binge Fueled ESOP Explosion
Lawmakers encouraged ESOPs by providing better tax incentives and added other enhancements in the late 70's and 80's. More than 24 different laws passed. A significant change allowed sub-chapter corporations to implement ESOPs. "S" Corporation ESOPs became extraordinary opportunities.
Congress encouraged them to set up plans that covered full-time employees with at least one year of employment. In some cases, the company became 100% owned by their ESOP, free from state and federal income tax. By design, these tax incentives were not loopholes. This major change went somewhat unnoticed because, at the time, the economy was robust. NYSE and NASDAQ performance was off the charts; millions of dollars in VC money was readily available; "merger-mania" was running wild and the announcements of new and successful IPOs seemed to occur non-stop.
Right Now, the Conditions Have Never Been More Favorable.
The Baby Boomer generation is retiring and thousands of them own successful businesses that were built in part due to loyal, long-term employees. They "want their cake and eat it too"; they want to sell their business for the market price, but also want to transfer this business to these loyal employees.
With an ESOP, both of those options can be accomplished. Plus with the tax benefits of an ESOP, the owner often nets more after-tax dollars than with a traditional sale and the business pays off the transaction faster.
Why Congress Endorsed ESOPs
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Is an ESOP Right for Your Business?
With over 50 years of proven results, the ESOP remains the most powerful tool for today's business owner seeking to unlock equity on their terms.