The 2020 Mid-Year Economic Update_long

Tip: Understand Long-Term Obligations for a Successful ESOP

Tracking expected retirements is one way to prepare for a successful ESOP.

Employee stock ownership plans have many benefits, including employee retention, but companies that were unprepared for payouts has forced the dissolution of many ESOPs. A clear understanding of long-term obligations connected to establishing an ESOP is absolutely essential for business owners, says Bob Dill, CEO of Hisco Inc. in The Ups and Downs of an ESOP.

“You'd have to be very naïve to not have a healthy respect for that obligation when you get into this," Dill says.

Companies that are not prepared to handle the repurchase obligation of an ESOP often fail to consider the impact of a large number of employees cashing out at the same time, according to a study by the non-profit organization National Center for Employee Ownership. This often happens during layoffs and especially during economic downturns.

Dill says that every year, financial officers at Hisco track expected employee retirements and payouts, and then transfer money into a sinking fund to assure that when the time comes, the company is prepared to make those payouts.

Read more about the importance of preparing for repurchase obligations when considering an ESOP in The Ups and Downs of an ESOP.

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