Across Indiana, a growing number of company leaders are exploring employee ownership as a long-term business strategy. While employee ownership succession planning has been implemented across all industries for decades, interest in employee-stock ownership plans, or ESOPs, has steadily expanded.
An ESOP is a federally regulated retirement plan that allows employees to become beneficial owners of the company for which they work. Through an ESOP trust, shares of the business are allocated to employee accounts. Unlike traditional retirement accounts, such as 401(k)s, this arrangement is typically at no cost to the employee. As the company grows and its value increases, the value of the shares increases, creating a retirement plan that is tied to the company’s success.
“In an employee-owned company, it is still run by the management team but with a caveat,” said Richard Van Doel, CEO and President of the Indiana Center for Employee Ownership (INCEO). “In an ESOP, employees are expected to provide ideas to provide direction and guidance in terms of how things can be done to make the company better and bigger for the future.”
ESOP by Acquisition
Doel noted that there are currently about 182 ESOPs in Indiana, but that number varies, and not necessarily because more or fewer companies are entering or exiting that business strategy.
“What’s interesting is that even if the number of ESOP companies holds steady, the number of employee-owners is increasing,” he said. “That growth often happens through acquisition.”
According to The ESOP Association, companies that are 100% S Corporations and sponsor ESOPs operate as tax-exempt entities on the federal level, and often at the state level as well. Because the ESOP trust owns the company, profits remain inside the business, rather than going to corporate tax.
“If you’re doing a million dollars a year in profit, a traditional company might write a very large check in taxes, noted Doel. “In a 100% S Corp, that money stays in the company either to service debt, reinvest or grow.”
That reinvestment power allows some companies to expand through acquisition, for instance, one ESOP acquires another business that was either operating as a traditional business or an ESOP. In that scenario, there would still be only one ESOP, but the number of employee-owners has increased.
Not All Employee Ownership is an ESOP
INCEO was created in 2017 by Doel, who has a doctorate in organizational leadership. He was navigating succession planning with a company he led during those years, but struggled to find good direction. He found that an entity that could provide ESOP education and advocacy at the federal and state levels, and within the business communities of Indiana, could be a major benefit.
“We've done ESOP research, we've done educational activities, we spoke at regional, state and national meetings, and guest lectured at some universities,” he said. “We spread the word on this segment of employee ownership and the value that it adds to the state and to the community.”
Doel is quick to note that employee ownership is a broad term that not only encompasses ESOP strategies, but also other forms of worker share opportunities, including cooperatives, employee ownership trusts (EOTs), or direct stock ownership arrangements. INCEO focuses on ESOPs, educating companies on their tax, retirement and successional planning advantages.
Retirement Impact
INCEO reports that, according to the U.S. Department of Labor’s 2024 data, there are currently 182,554 ESOP participants throughout the 182 ESOPs in the state. While the majority of ESOPs are located in major metro areas, such as Indianapolis and Fort Wayne, many are operating in communities of all sizes throughout the state.
Whether a company chooses to remain smaller or expands through acquisitions of other ESOPs or more employee owners, the retirement impact for participants in Indiana is growing.
The Department of Labor reports that the average ESOP account balance for Indiana employees in 2024 was $156,157, more than the average 401(k) account balance of $148,153, according to numbers from Vanguard.
For employees, Doel noted, they are not only building more retirement wealth through the ESOP, but they are doing it in a way that doesn’t take from them in the process.
“If you have a 401(k), 95% of that money is yours, and you’re taking money away from your family to be able to put it in there,” he said. “But in an ESOP, 98% of the time, all of those funds come from the company because it's the company that purchased the stock, and it's the company that's buying it, and there's zero contribution from the employee.
“So, if you take someone and you say, ‘Hey, how would you like to have $150,000 in your retirement at no cost to you? That sounds like a pretty sweet deal.”
Confronting the Succession Gap
On a national level, there is a definite need for succession strategies. In a report from Harvard Business School’s Institute for Business in Global Society, the author quoted a statistic from the Exit Planning Institute that only 20% to 30% of U.S. businesses on the market actually sell. That data, coupled with the fact that over half of all U.S. private business owners are over the age of 55, could have extreme negative impacts on communities if those companies have no succession plans in place. Some refer to this as the “silver tsunami.”
Doel noted that in a 2016 survey by the U.S. Census Department, researchers found that 30% of reporting companies with owners aged 55 and older had zero success planning done.
“And that held true for Indiana as well,” he said. “If we say there are 55,000 Indiana businesses that are owned by owners age 55 and above, and project equity says 35% can be accounted for by a sale or transition to the next generation, which leaves 65% that we don’t know what will happen to them. So, that is 36,000 Indiana businesses whose long-term future faces an unknown.”
For many company leaders, the hesitation to succession plan is less about financial or availability, and more about psychological reluctance, Doel said.
“For many people, you are what you do, and all of a sudden, now, you are forced to think about how you aren’t going to be the president anymore. So, it’s easier to think about that tomorrow,” he said.
But Doel noted that ESOP structures offer a way that owners can sell just a minority stake in the company, allowing them to lead the company for years. Or they can structure a more phased exit over time.
“You can sell to an ESOP and still stay on as president,” he said. “You control when you leave. That continuity matters to many.”
Indiana’s Future ESOP Landscape
Doel said he doesn’t expect the number of ESOP companies in Indiana to ever surge dramatically. But, as an aging population of business owners retires, advocacy and education have become even more important. In addition to INCEO, the Indiana Chapter of The ESOP Association provides education and networking opportunities to the more than 115 Indiana ESOP companies that belong to the organization.
Doel said that as these entities continue to inform business advisors about alternative succession tools, the number of employee owners will continue to grow, either through new ESOPs or by acquisition.
“ESOPs are great for the selling owner. They’re great for the employees,” he said. “But when you look at how they are helping people have a decent retirement and keeping companies local, that’s where the real impact is.”
