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ESOPs: Will Colorado Law Bolster Employee-Owned Businesses?

A new law in Colorado offers help to business owners who want to sell their companies to employees rather than an outside interest, the Denver Business Journal reported.

Signed into law Thursday, the bill requires the Colorado Office of Economic Development and International Trade to promote employee stock ownership plans (ESOP) to owners who might be interested in them, and it allows the state agency to loan owners up to $10,000 to cover costs.

The bill’s sponsor, Rep. James Coleman, told the DBJ that some mom-and-pop businesses like restaurants and retail shops who want to convert to employee-owned companies cannot afford the approximate $20,000 cost.

ESOP Risks and Rewards

In an ESOP model, business owners gradually shift their stakes in a company from themselves to their employees. The transition often allows entrepreneurs to unlock value from their companies, and it offers aging owners an exit strategy. Employees, in turn, pay no tax on the contributions to the ESOP, only the distribution of their accounts.

In 2015, some 40 years after the first ESOPs arrived, there were about 8,900 ESOPs in the United States covering 13.5 million workers, according to investment banking firm Butcher Joseph & Co., citing data from the National Center for Employee Ownership (NCEO).

From 2002 to 2015, between 80 and 150 U.S. companies converted each year, according to a report by Matrix Global Advisors, which is about equal to the number of initial public offerings (IPOs) each year.

ESOPs do involve some risks. Companies that have consistently weak earnings, poor internal controls, and weak succession plans can implode under ESOP ownership models, according to Gibson.

However, employees at ESOPs tend to be more financially secure, a recent study suggests. Employee-owners are more optimistic about their opportunities for financial advancement, and they are far less likely to have economic insecurities, the Employee-Owned S Corporations of America (ESCA) commissioned study revealed.

MSPs Becoming ESOPs

Quite a few MSPs have moved to ESOP models, including Modern Technology Solutions Inc. (MTSI) — which gradually transitioned to an ESOP business over the past decade. The engineering services and technology solutions provider announced earlier this month that had reached 100 percent employee ownership.

The strategy appears to have worked for MTSI, which boasts an employee retention rate of more than 93 percent.

Midsize IT company Phacil also made the transition in January 2017.

Back in Colorado, the ESOP philosophy is gaining momentum, particularly in the craft-brewing industry, according to the Denver Business Journal story. In recent years, New Belgium Brewing and Odell Brewing, both in Fort Collins, became employee-owned companies, as did Left Hand Brewing of Longmont.

NCEO supports other states offering tax breaks to business owners selling to an ESOP, and it has published a study promoting the benefits. There are at least eight ESOPs in every state, and California, Ohio and Vermont have dedicated employee ownership offices to foster ESOP growth.

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