Episode 181 - Kelly Finnell, Author of The ESOP Coach, Explains How ESOPs Work

Disruptive Successor Podcast

Dr. Kimberly Wagner is a licensed psychologist and performance coach with over a decade of experience working with elite athletes and business professionals, including Major League Baseball players. She conducted a study on the mental skills and characteristics that enhance performance in Major League Baseball players, which led to the development of her online course, Believe It, Achieve It. Dr. Wagner is dedicated to helping individuals overcome mental blocks and cultivate a winning mindset for success in their careers.

SHOW SUMMARY

In this episode of the Disruptive Successor podcast, host Jonathan Goldhill is joined by Kelly Finnell, a leading ESOP consultant, to discuss the intricacies and benefits of Employee Stock Ownership Plans (ESOPs) as an effective business succession strategy. Kelly provides insights into how ESOPs function, their tax benefits, the impact on company culture, and the feasibility for various business types. He also addresses common myths and concerns related to ESOPs, offering real-world examples and case studies. This episode aims to provide next-generation leaders and entrepreneurs with valuable information on leveraging ESOPs for successful business transitions while fostering employee ownership.

KEY TAKEAWAYS

• Introduction to ESOPs: An Employee Stock Ownership Plan (ESOP) is a form of retirement plan that invests primarily in the stock of the sponsoring employer, providing both an exit strategy for business owners and benefits to employees.
• Target Companies: ESOPs are ideal for small to mid-sized companies with stable and predictable revenues, typically with at least $2 million in EBITDA. They are particularly beneficial for professional services firms.
• Tax Benefits: Significant tax advantages exist for both the selling owner (potential deferral or elimination of capital gains taxes) and the company (operating tax-free if it's an S corporation).
• Financing ESOPs: The ESOP is fully financed by the company, not by the employees, making it possible for employees to become owners without needing to invest their own money.
• Ownership Culture: ESOPs promote an ownership culture within the company, aligning employees' interests with the company's success, which can lead to increased productivity and motivation.
• Succession Planning: ESOPs can be used effectively in family businesses to manage generational transitions, ensuring fair distribution of the estate among family members.
• Feasibility and Implementation: The process begins with a feasibility study to evaluate the potential outcomes and involves significant communication and education efforts to ensure employee buy-in and understanding.

QUOTES

• "ESOP solves that problem: it is entirely financed by the company. The employees don't come out of pocket with any money. It's a benefit plan for them, not an investment plan."
• "I always tell business owners that the best candidate for an ESOP is a company where the owner comes in late, takes a long lunch, and leaves early."
• "You have to have a strong successor management team."
• "The reason the ESOP outperforms is because with an ESOP, you're getting a leveraged rate of return on the employee's accounts."
• "If a business owner sells to private equity, the way the government would look at that is you have a rich person selling to other rich people."

Connect and learn more about Kelly Finnell.
LinkedIn: https://www.linkedin.com/in/esopcoach/

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