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

Kelly Finnell is a leading expert in Employee Stock Ownership Plans (ESOPs) with over 40 years of experience. As one of the nation’s premier ESOP consultants, Kelly has designed and executed numerous ESOPs and has shared his expertise at more than 300 conferences and meetings globally, including in London and Sydney.

In 2010, Kelly authored "The ESOP Coach: Using ESOPs in Ownership Succession Planning," the most comprehensive guide on ESOPs available today. He has also published numerous articles on the subject, further establishing his authority in ownership succession planning.

Kelly’s firm, Executive Financial Services, established in 1981 and based in Memphis, Tennessee, is dedicated exclusively to ESOPs. With a highly qualified team, they have successfully executed transactions in 38 cities across 19 states, focusing solely on ESOPs.

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."

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