Unpacked: What is an ESOP, and why are more brands considering them?
When furniture company Room and Board was considering its future after more than 40 years in business, company leaders discussed an IPO, selling to private equity or even becoming a non-profit.
Founded by John Gabbert in 1980, Room and Board had around 27 shareholders at the time, and Gabbert was in his late 70s, raising questions about what was next. However, it also had a profit-sharing program in place for employees and was accustomed to sharing financial information across the entire company. Then, in April 2024, it announced it had transitioned to an employee stock ownership plan, becoming 100% employee-owned across its 1,100-person staff.
“Employees were already thinking about, ‘How do we contribute to the business? How do we help?'” CFO Jean Sand told Modern Retail. “And so that ownership mindset has a little bit more of a fine point on it, and it’s a continuation of what we’d already had in the culture.”
As private companies mature, going employee-owned is increasingly showing up as an option for brands and manufacturing companies. Employee stock ownership plans, or ESOPs, function as retirement plans where employees own part or all of the company’s stock. Companies can be 100% employee-owned, like Room and Board, or have part of the ownership divvied up among employees.
Collectively, employees enrolled in ESOPs across the country hold $1.377 trillion, according to The ESOP Association. But it could become a more common option for company ownership as the “Silver Tsunami” hits the business world. About 46% of private companies are owned by Baby Boomers who are going to retire in the near future, according to federal Annual Business Survey data compiled by The ESOP Association. This affects around 2.9 million firms, the data show. More than 330,000 of those companies are in the retail trade sector, plus more than 154,000 in wholesale trade and over 127,000 in manufacturing.
Here’s a breakdown of how ESOPs work and how some brands are using them.
How an ESOP works
ESOPs are a type of retirement plan based on the valuation of the company that is offered to employees. Unlike a 401(k), employees can’t borrow early from an ESOP plan. Rather, they only get bought out when they leave the company or retire.
At flavored syrup company Torani, for instance, employees get a minimum of 5% of their salary in an ESOP after one year of employment. Then, every year, they get a new tranche of stock based on a new valuation done by a third-party financial firm. Torani CEO Melanie Dulbecco said the company averages 20% annual growth.
Why companies move to employee ownership
At Room and Board, Sand said the day-to-day hasn’t changed much since becoming employee-owned. But the decision came down to finding a way for the company to continue in perpetuity as Gabbert aged.
“We just recognized that we had a responsibility to the current and future generations to figure out what we were going to do to ensure that this company continues and thrives into the future,” she said. “I think this was really a relief to them to know it was going to carry on.”
For Torani, a 100-year-old company that crossed $500 million in revenue last year, the ESOP is part of a suite of benefits to employees that helps retain and grow the company. Dulbecco said Torani was partly inspired to start the plan in 2021 after seeing surrounding tech companies in the Bay Area use stock options as a competitive advantage when hiring high-level talent. But Torani decided to create a plan that would be extended to all workers.
“Our goal wasn’t to create a stock plan just for people at a certain level in the business, but to create stock for everyone,” Dulbecco said. “We want people to be taken care of in the future, no matter what might happen with federal budgets.”
Retention benefits and incentives for growth
One common refrain about the benefits of ESOPs is retention. The ESOP Association found that employees with ESOPs have an average tenure that is 46% longer than that of non-employee owners. And about 80% of business leaders offering ESOPs feel they are better at recruitment and retaining workers than their competitors.
At Torani, employees stay an average of 5.5 years, well above the national average of 3.9 years. The company has grown its headcount by 44% in the last two years. Dulbecco credits the growth to the overall company culture, while the ESOP helps the company share successes, she said.
“It connects people to what we’re doing,” she said. “We have quarterly town hall meetings where we share how we’re doing, what’s going on with our customers, where we’re having struggles and where we’re winning. People are into it, and they know that they have a piece of it, and it means a lot.”
Restrictions and challenges of ESOPs
Though it can be considered a stable retirement offering, ESOPs can be restrictive in terms of how people can use them. Employees cash out when they leave or when they retire — meaning it isn’t something that can be borrowed from while the person is still employed at the company.
From the company’s standpoint, there’s a significant undertaking in transitioning to employee ownership or starting one more benefit plan to manage. It inlolves administration and legal costs, plus the costly and time-intensive undertaking of doing an annual valuation.
Also, since the company is on the hook for paying out the plans once they leave, there’s the ever-present risk of having to buy back shares — which could be a problem if employees left en masse.
As such, ESOPs tend to be favored by older companies with stable revenues and profitability.
“They are not for the faint of heart,” Torani’s Dulbecco said. “It’s a big deal to put together an ESOP, and we take it really seriously.”
At Room and Board, Sand said the company is spending more time educating employees on how the ESOP works and what it means — plus managing the extra administration responsibilities. She said the company has relied on external partners, particularly Chartwell Financial out of Minneapolis, where the company is headquartered, for external support and expertise.
“Our education plans have had to be a little bit more robust,” she said. “I do think the benefits are abundant, but certainly there are work and dollars associated with that setup.”
Why an ESOP alone isn’t enough
While there are clear benefits, Dulbecco said an ESOP alone isn’t the reason people stay at Torani. She said a dedicated onboarding process and ongoing professional development help ensure people are growing and advancing their careers across functions — they call it “career mixology,” she said.
Torani, for instance, has never laid off employees in its 100-year history.
“It’s not the ESOP alone. It’s the system by which we work,” Dulbecco said. “It’s got to be a whole system of care and interest in the people who work with our company.”
As Room and Board, Sand said the ESOP hasn’t been in place long enough to discern any retention or tenure effects. But, she said, it is a continuation of what the company already tried to bring into its culture.
“The ownership mindset is just so critical,” Sand said. “I just think about like how successful a company can be when everybody comes to work every day and knows, ‘I’m part of this, and I can contribute to this.’”