Financial Benchmarking — A Powerful Tool for ESOPs
Employee ownership creates great wealth opportunities for your employees; however, educating employee owners is a challenge for all Employee Stock Ownership Plans (ESOPs). Some employees naturally have a higher level of financial acumen than others, especially when it comes to the valuation of their stock.
Before the COVID-19 pandemic in early 2020, the U.S. economy grew for a record 128 straight months. Although this expansion has been terrific for stock valuations, it has left Chief Financial Officers (CFOs) and ESOP management with the difficult task of managing employee expectations. Even when the value of an employee’s stock appreciates, they may question why it grew less than previous years.
Imagine what could happen during a recession or if the value of the stock declines for a year.
Financial Benchmarking Is Key
A powerful tool to help CFOs and ESOP managers is financial benchmarking. Financial benchmarking allows a company to compare their results to companies of similar industry and size. ESOP managers can use these reports to educate their employees, justify stock valuations, and ultimately, maximize their stock price. For example: A company may show that their net income and return on equity are superior to their competitors and that is reflected in their valuation.
Alternatively, management may show that operating expenses, debt, or other liabilities are higher than their competitors, which negatively affected their valuation. A company may even use this as an opportunity for improvement by challenging their employee owners to get better, cut costs, and increase their valuation. One of the most difficult challenges that all ESOPs face is getting their employees to understand that they are now owners and their actions can have an impact on the company’s bottom line. Financial benchmarking and education can help ESOP executives with this challenge.
Financial benchmarking can also help with outside stakeholders, such as lenders and surety bond companies. ESOP companies often outperform their peers in many financial metrics. However, debt associated with stock purchase can make ESOPs look unfavorable to some lenders and bond companies when viewed on a standalone basis. Using benchmarking, an ESOP manager can show that even with the debt obligations, they have strong profitability, liquidity, and cash flow compared to their peers. These metrics can be used to sway underwriters and loan committees on the ESOP’s merit.
Financially, financial benchmarking is a great tool to help ESOP management make decisions and improve their company. Being able to compare overhead, debt, and other metrics to competitors often leads to better decisions.
For example: A company may look at revenue per employee to better understand their overhead and help them make hiring decisions. They may also look at fixed assets and depreciation to decide when it may be time to replace or upgrade equipment. There are many valuable insights that can be gained from financial benchmarking.
Financial benchmarking is a great tool for all businesses to understand their performance against their peers. For ESOPs, it can be a great tool to educate employees, justify stock valuations, and create improvements.
Holmes Murphy specializes in ESOPs and financial education. We can also provide these key benchmarking reports, as well as other important analytics to our ESOP clients to create opportunities for improvement and growth. If you’re interested in learning more or want to chat about your own metrics, feel free to reach out to us. We’re happy to help!
Published on: 07.18.22