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Will implementing an Employee Share Ownership Plan (ESOP) mean I need to hand over control of my business?

FAQ

Will implementing an Employee Share Ownership Plan (ESOP) mean I need to hand over control of my business?

By , October 18, 2019
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An Employee Share Ownership Plan (ESOP) is a structure to allow employees to buy shares in the company they work for and are very popular in the USA and Europe. They are used as a method to attract, retain and motivate key employees.

In simple terms, an ESOP is a plan with an agreed set of rules to gradually sell or transfer equity ownership to employees within the company. These plans are becoming more common in Australia as a succession strategy and also as a productivity and engagement tool.

The Australian government introduced new rules in 2015 to encourage the use of ESOP’s in Small & Medium Enterprise (SME) including generous tax concessions.

Many employers raise concerns about using an ESOP and the “loss of control”, this is not the case and can be easily avoided as the plan is designed with appropriate corporate governance in place. The right structure will provide protection to all parties, governance of both the plan and the company and management control.

If my employees own equity, does that mean they have control?

You can own shares in BHP and not have any control over the business – the principle is the same. The ESOP rules govern the operation of the plan including control and the rules are designed to better align your interests (as a business owner) with theirs (as employees). The rules should ensure both parties are focused on improving the performance of the business and therefore building the equity value, whilst protecting all participants – the company, the employees and the founders.

You can use an ESOP to gradually handover control as you reduce your involvement in the business – but this is managed by you on your timeframe and is not legally required.

The academic research tells us that most employees do not want control or to run the business but they are very happy to own equity in the business they work for and work alongside founders to grow the business equity value.

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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