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Employee Share Ownership Plans (ESOP) as a Funding Option?


Employee Share Ownership Plans (ESOP) as a Funding Option?

By , July 31, 2018

Many people are aware we use Employee Share Schemes (ESS) as a Business Succession and Exit Planning tool to help retain key people, to improve SME performance, to build the team culture and engagement. They are also well known as a potential exit strategy where the founders sell the business over time to the employees.

Employee shares in private companies are also a potential funding option. The rules were improved in 2015 to make employee share plans more attractive and easier to implement. As a by-product, the plans can be used to ease cash expenses and can also be used to raise capital by having employees buy-in.

Tax-Free Plans

The traditional tax-free plans have always allowed employees to obtain up to $1,000 in “free” shares per annum. Most listed companies utilise this model and there is no reason why smaller privately owned companies cannot use the ESS rules in the same way.

Salary Sacrifice

The new rules also incorporated a salary sacrifice model whereby employees can salary sacrifice up to $5,000 per year to contribute to an ESOP. This can also reduce the cashflow cost to the employer whilst providing employees with access to equity in the company they work for.

Employee Remuneration Trusts

In the same way, the Employee Remuneration trust style plans – like our Peak Performance Trust allows employees to contribute financially to buy the shares. This is a mechanism to provide additional capital to the company. This can also be aided thru the use of a vendor (company or founder) loan to allow the employee to buy more shares. This capital can be used to fund growth (issue of new shares and capital retained by the company) or can be used as a succession tool to buy-out the owners (sale of shares and capital provided to the existing shareholders). Both methods work to obtain capital and can be an excellent succession funding option.

Obviously, the employee share plan must be designed to meet the rules, but this is not as difficult as it used to be under the old rules. Employee shares in a private company can be used as a funding mechanism, in various formats, with substantial other benefits in terms of performance and engagement.

Craig West

Craig West

Executive Chairman | Succession Plus

Craig West is a strategic accountant with over 20 years of experience advising business owners. His background as a CPA in public practice has provided invaluable experience in the key issues of concern to business owners.

In March 2014, Craig was appointed Executive Chairman of the SME Association of Australia, Australia’s largest small business organisation representing over 300,000 business owners.

In October 2014, he was awarded the Exit Planner of the Year at the Exit Planning Institute Annual Conference in Texas, USA, due to his innovative development of an exit planning process to help business owners maximise business value and achieve a successful exit.

Craig’s proprietary structure - a Peak Performance Trust - has won the Australia-wide award for the Employee Share Ownership Plan of the year twice in four years.

In November 2018, Craig launched SME Experts in partnership with Mark Bouris’ Mentored on Podcast One and quickly grew the monthly podcast audience to over 26,500 downloads; in October 2019, he released a new podcast focused on medium-sized businesses - Mid-Market Matters.

In July 2021, Craig joined the NSW Committee for STEP (Society of Trust & Estate Practitioners) – focusing on advising families across generations.

Craig has also launched a SaaS platform, Capitaliz (which captures the 21-step process), to assist other advisers internationally deliver advisory services at scale.

In November 2021, Craig was appointed Executive Chairman of NSW Leaders, a business mentoring group for leading NSW businesses.

In July 2022, Craig West received the award of Doctor of Business Administration for his research thesis titled “Examination of the key factors driving business exit options in Australian Small and Medium Enterprises.”

Craig is passionate about encouraging business owners to think strategically, maximise the value of their business and achieve a successful exit.

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