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FREE Webinar – Employee Share Ownership Plans (ESOP)  Register Now

Increase productivity and maximise employee retention

An innovative way to gain productivity and retention benefits is to invite employees to invest in your business through a share plan.

With Employee Share Ownership Plans you can;

Structure your business so everyone shares in its success

Retain as much or as little operational control as you want

Preserve your business by leaving it in trusted hands

Employee Share Ownership Plans (ESOP)

Employee Share Ownership Plans (ESOP) are increasingly being used by business owners who want to gain immediate term productivity and engagement benefits while providing longer-term stability for their business.

An ESOP is a mechanism to allow employees to own a share of the company they work for.

Advantages for you as the business owner;

  • You can attract and retain high calibre staff by offering a direct stake in the business
  • When you want to move on from your business an ESOP can be an effective and efficient way to transfer ownership
  • Save tax by making payments to the ESOP that are deductible

Advantages for your employees include;

  • Providing a savings vehicle where they can accumulate savings, acquire and hold shares.
  • Creating a sense of community as employees feel more committed to ensuring the business thrives
  • Save tax by purchasing shares from pre-tax dollars

How To Set Up An ESOP

Getting your ESOP right is an important process – you need it to be attractive to your employees as well as support your business objectives. It has to be cost effective and easy to implement.

Above all the most important thing is to have a completely transparent and easy to understand scheme so that employees are clear on what they are participating in.

After extensive research, the ESOP we use and recommend is called the Peak Performance Trust (PPT).


How the Peak Performance Trust works:

Set up trust

You as an employer create an investment trust (we do this for you).

Make contributions

You will then make regular and predetermined contributions to the trust on behalf of, and for the benefit of your employees, contingent upon them achieving predetermined performance outcomes.

As the profits increase, so too does the percentage share that employees can benefit from. If profits are not increased, then no further allocation of funds is made to the PPT. That means you all have a shared stake in the success of the business.

A Peak Performance Trust is a “win/win for exiting owners who want the best for the business and to achieve the best sale price for their asset, and for their employees.” – LJ Hooker Franchise Manager

Case Study: A successful ESOP fuels Umwelt’s performance culture

Recently working with Environmental & Social Consultants, Umwelt, Succession Plus developed a tailored Employee Share Ownership Plan that worked for them and their employees. Watch our latest case study demonstrating how employee attitudes, actions and the overall business environment was positively impacted through ESOPs.

Umwelt ESOP Case Study

Frequently Asked Questions on ESOPs

  • What is an Employee Share Ownership Plan (ESOP)?

    • An Employee Share Ownership Plan (ESOP) allows employees to buy or earn equity in the business they work for with tax concessions. ESOPs are becoming more popular in Australia and are effective at attracting, retaining and motivating key employees by providing both income and capital gains benefits.

  • Are all Employee Share Ownership Plans (ESOPs) the same?

    • Employee Share Ownership Plans (ESOPs) are also often referred to as Employee Share Schemes (ESS), Employee Share Plans, Employee Share Option Plans, Employee Equity Plans and Employee Ownership Plans. They all refer to the same thing – a structure for employees to own shares in the business.

  • How does an ESOP work?

    • An ESOP is a separate legal structure (also sometimes referred to as an Employee Share Scheme or ESS) that is owned by employees and holds shares in the parent company (employer). This creates real equity ownership for employees and allows them to receive both dividends and increases in value in the business.

  • What does it mean to be an employee-owned business?

    • Businesses which are employed-owned have the majority of their equity ownership inside an employee share plan, these businesses tend to retain employees longer and research also shows they are generally better at customer service and quality. Employee ownership means employees are financially invested in the success of the business.

  • How are ESOP shares allocated?

    • ESOP shares are typically allocated in one of two ways:

      Equally, where all employee-owners hold equal shares, or proportionally, where employees own shares based on performance, seniority, length of service, net promoter score or other similar measures to allow those employees who contribute more to the business to own more shares.

  • What are the advantages of an ESOP for my employees?

    • Employees benefit from an Employee Share Ownership Plan (ESOP) in three ways:

      Financial alignment with the business and its owners, access to income (dividends) and access to increases in value of the business (capital gains).

      They are also more likely to be involved in decision making.

  • What are the advantages of an ESOP for my business?

    • The advantages of an ESOP for businesses are typically the ability to attract, retain and motivate key employees. Better employee engagement and involvement in the business and the increased financial incentive for employees to focus on business improvement in productivity, quality and profitability.

  • What are the advantages of an ESOP for myself, as a business owner?

    • The advantages of Employee Share Ownership (ESOP) for business owners are largely focused on improved employee retention, more alignment with employee interest and increases in productivity, profitability as well as improved quality control and customer service. ESOPs can also provide a Business Succession Plan option.

  • What is the cost of implementing an ESOP?

    • Implementation of a properly designed Employee Share Ownership plan (ESOP) should take approximately 3 months and include a business review and valuation, a design phase, an employee education seminar and briefing documents, and all the legal and technical documents required. This should cost somewhere between $15,000 – $30,000.

  • Do employees need to be on the board if they own shares?

    • No, there is no requirement for employees to join the board if they own shares as part of an Employee Share Scheme (ESS). Most employees do not want to join the board as part of an ESOP. They want to be more involved, however, can often provide ideas without being on the board.

  • Will implementing an employee share plan mean I need to hand over control of my business?

    • No. ESOPs are not designed to transfer control (until you are ready), they are designed to transition equity to your employees to better align your interests with theirs. In most cases we use a corporate trustee for the ESOP and the directors of the corporate trustee (which manages the ESOP) are the same as the main trading entity

  • Do my employees expect to pay to join an ESOP?

    • In most cases we can design the Plan so the employees can contribute, but we normally recommend this is not compulsory – otherwise, you might preclude good employees who simply can’t afford to write out a cheque to participate.

  • Who pays for the admin costs of administering the ESOP?

    • The PPT pays all costs to administer the ESOP after set-up, which is normally paid by the employer/trading entity. Admin is done centrally by Succession Plus. Whilst the admin is not rocket science, it is very important it is done correctly. We have had one client who suffered a payroll tax audit because the admin was managed by their accountant incorrectly. The typical ESOP costs about $5,000 p.a. to run including bank, admin and accounting fees. It needs to lodge a tax return. Our admin fee includes an annual valuation, which is also required by law.

  • How do I account for the contributions - expense vs capital?

    • The contribution to the PPT are a deductible expense to the company (under 8-1) as they are directly related to employees and should be accounted for separately in the P & L as “ESOP contribution.”

  • How does this affect the normal laws regarding employment/HR?

    • The introduction of an ESOP does not change the employment relationship and all of the normal HR laws apply to employees who are members of an ESOP.

  • Are employees equal or different in ownership levels?

    • Employees can be equal, and we have several clients who have done exactly that. More commonly, employees are allocated different amounts of equity based on salary (seniority), years of service and a performance score or some combination of these factors. It should not be discretionary.

  • How much equity do I need to sell-down?

    • There are no hard and fast rules (and no limits imposed by the taxation law governing ESOPs). We have implemented plans with as little as 10% of shares held by the ESOP and somewhere the ESOP is gradually buying the whole business (100%).

      The amount you sell needs to be enough to be of value to employees and provide a reasonable stake in the business.

  • When I sell an ESOP, do I pay Capital Gains Tax?

    • Yes. Your sale of shares is a taxable event for CGT, but you will still be eligible for all of the Small Business CGT concessions in the same way as if you sold the business externally.

  • How do buyers view a business with an ESOP?

    • In most cases, this is a strong advantage. In many businesses, the key risk from a buyer’s point of view is the risk of employees leaving immediately after a sale. Whilst the ESOP cannot stop this, it can certainly reduce the risk by locking employees in with an equity stake. Many plans which are introduced in the lead up to sale include a stay bonus – an extra contribution made to the ESOP if, for example, employees stay for 24 months after the sale. In some cases, the buyer will have an ESOP already and simply roll your employees into their plan, many will just continue the existing plan, while in some cases, the buyer may choose to pay out the plan.

  • What happens to an ESOP if the company makes a loss?

    • In the year that the company makes a loss, there are 3 implications – firstly, no contribution will be made, and no further units will be issued in that year, secondly, no dividends are likely to be paid or at least dividends will be reduced, and finally, the valuation of the business (and the ESOP) will decrease.

  • Can we loan funds to speed up the ESOP?

    • Yes, this then makes the ESOP a leveraged ESOP, a very popular vehicle in the US. The employer (or founder) could lend money to the PPT to accelerate the purchase. A commercial loan agreement would be needed, interest could be charged, and security taken over the shares purchased using the loan funds. In addition, priority over dividends so that they are used to repay the debt before being distributed to unitholders.

Let’s Get Started

Book an obligation-free 30 minute appointment with a Succession Plus adviser to see how an Employee Share Ownership Plan (ESOP) can benefit your business. Get in touch today.

Umwelt is an environmental and social consultancy, with over 120 people providing services across the nation. We have worked with Succession Plus for over 10 years, during which time Craig West provided business and succession planning advice, and, Craig and the Succession Plus team guided us through the process of establishing our Employee Share Plan. Our Employee Share Plan is now well established, with 55 (44%) of our team now being ESP participants, expected to grow to 55% of our team participating by the end of 2020. The Succession Plus advice and support during this process has been outstanding, providing timely guidance and insight to our Board and Executive Team, in addition to providing training for our whole team, and maintenance of the ESP process. We are so very pleased to have a growing number of our team thinking and acting like business owners!

Barbara Crossley