ESOPs Can Work in Small Companies Too

A common misperception about employee stock ownership plans (ESOPs) is that they only work for larger employers. Rules of thumb vary; some practitioners say $1 million in revenues; some say 20 or 30 employees are needed before an ESOP makes sense. Some smaller employers have set up ESOPs quite successfully, however. For instance, Lightworks Optical in Irvine, CA has just 14 employees. It paid between $30,000 and $40,000 to establish its ESOP in legal, valuation, administrative, and accounting costs. The plan, designed primarily as an incentive and reward, provides that the company will contribute new shares of stock to employees. Other plans in small companies have bought out owners. Packaging Consultants in New Bedford, MA set up a leveraged ESOP to buy out its owners when it only had eight employees.

While the costs are substantial for setting up an ESOP (Lightworks had a typical experience), companies need to compare these costs with the often very substantial tax benefits ESOPs offer, as well as the often high costs of selling stock to other buyers.

For more details, see our Interactive Introduction to ESOPs on this site.