While employment reports are showing signs of improvement, there is no question that protecting and creating jobs continues to be top of mind for federal and state governments.
In the heartland of America, one state has taken action to help avert a threat to jobs on Main Street—the growing numbers of baby boomer business owners beginning to transition into retirement.
In Iowa, as in most states across the nation, retiring business owners are often forced to sell because most of their net worth is tied up in the business. If the business is sold to an out-of-state buyer—which isn't uncommon—local jobs can be lost because those buyers may not have reasons to stay in the community.
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Iowa passed a first-in-the-nation law that encourages business owners to explore another alternative: selling the company to employees through an employee stock ownership plan (ESOP).
Why ESOP?
ESOPs are qualified retirement plans that are invested primarily in the common stock of the sponsoring company. Although there are no guarantees, ESOP-owned companies are more likely to stay, and grow, in their local communities. The employees, as owners, typically have a history—and a future—in those communities.
The "new law" offers business owners financial assistance to determine if an ESOP is right for the business and a tax break—a 50 percent deduction from state capital gains tax when they sell 30 percent or more of the business to an ESOP.
ESOPs and job growth
Iowa knows it stands to benefit because ESOP companies have a track record of performing well and creating jobs:
- In the Employee Ownership Foundation's 2011 survey, 80 percent of ESOPs report an increase in stock value, based on independent valuation, despite the slow recovery
- ESOP companies bounced back more quickly after the recession and increased jobs by 60 percent over the past decade while job growth in the private sector remained flat, according to a study from Matrix Global Advisors.
- Employees have a better chance of seeing a direct link between their job performance and their personal financial security because they share in any increase in company value through growth in their retirement plan balance.
- ESOPs also have a significant impact on employee retirement savings. The Employee Benefit Research Institute reports more than half of Americans say they have less than $25,000 in savings. The average account balance for ESOP participants is $195,000, according to the ESOP Association.
- The tax treatment of ESOPs allows many firms to better manage their cost structure and therefore their competitive posture.
ESOPs are good for the selling owner, the company, the employees and states like Iowa. And they are good for financial professionals. An ESOP transaction can generate significant investable assets along with cross-selling opportunities.
Coming soon to a state near you?
Although Iowa has done more than any other state, others recognize their value. Vermont, Ohio, and California have programs to educate business owners about the plans. Indiana has a program that assists banks in funding ESOP transactions.
A few states have expressed interest in following Iowa's lead. For financial professionals who understand how ESOPs can boost their own business and help an economy, this is an opportunity to provide a community service by raising the topic with legislators or local and state economic development staff.
You may just save some jobs.
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