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Interning to Improve Lives of Employees and Owners
By Michael Krause
Michael Krause, 2012 Rady MBA
Employee stock purchase plans, employee stock ownership plans (ESOPs), phantom stock, stock appreciation rights, vesting schedules, stock grants, and everything else under the sun — this is the toolbox we work with at the Beyster Institute. As a first-year full-time MBA at the Rady School of Management, I’ve been fortunate to be a part in the process of helping company leaders transfer ownership to their workforce.
Originally I started work with the Beyster Institute because I was inspired by the brilliant concept that both company founders desiring to sell their businesses and their employee organizations could be made better off from an ESOP. I’ve learned an ESOP is essentially a retirement plan, a trust that holds company stock on behalf of all of the employees who participate in the plan. When an employee retires from the company where they own ESOP-allocated shares, the ESOP itself has the obligation to buy their shares from them with cash. The ESOP keeps the ownership in the people who actually work at the business.
For a company founder looking to leave their business, sometimes with the desire to retire, often they have one of three choices. First, they might transfer ownership to a family member, someone who might not have the necessary experience to run the business. Second, they can shut the business down, putting their employees out of work. Last, they have the option to sell the business to an outside buyer. All of these choices result in outcomes that imply potential future job uncertainty for the company’s employees.
The ESOP presents a fourth choice, where the company owner can transfer his or her company stake to the ESOP, which then gets distributed gradually over time to the employees. The exiting owner receives cash as with a conventional business sale, either from a bank loan or the company’s cashflows, and is enabled to leave a legacy of an operating business without his or her presence. Employees get a renewed opportunity to build something they can honestly appraise as their own, a great payoff for all they’ve already invested. On top of that, future business profits distributed through an ESOP are not taxed, and the founder’s would-be capital gain taxes can be avoided entirely if his proceeds are immediately reinvested into qualified investments and those are passed to his or her heirs. Both sides are made better.
Being a part of a process that improves everyone’s condition is an obvious win-win. As interns, we help this process along by plugging our client’s financial picture into a proprietary model that helps pinpoint and present the optimum stock compensation plan (including the ESOP mentioned above). This model is a constant work-in-progress developed by a whole lineage of past Beyster Institute interns, and is perpetually improved to meet unique challenges our varied clients present to us. It is very satisfying to be the one bridging the gap between a “model problem” and a “customer need” and helping owners make the right decisions that enable their employees to have a piece of the American dream.