A sale to an Employee Stock Ownership Plan (ESOP) is a rarely used Exit Path, but business owners have begun taking interest in the possibilities they provide. In fact, 6% of business owners who responded to The BEI 2016 Business Owner Survey reported interest in pursuing a sale to an ESOP. Given the rarity and relative complexity of this Exit Path, what interests some owners about it?
An ESOP can be many things, but in its simplest form, it’s a qualified retirement plan that must invest primarily in the stock of a business owner’s company. When pursuing an ESOP as an Exit Plan, business owners sell their stock in their businesses to the ESOP.
ESOPs can be advantageous for business owners because they allow owners to attain financial security through a partial or complete sale of their ownership interest. Additionally, owners can stay in effective control until they are paid in full. Perhaps most appealing is that owners can enjoy effective control even after they have been fully paid, which lets owners who always want to be a part of the business have their cake and eat it, too.
Sales to ESOPs can be designed to accommodate an owner’s desired departure date, whether that date is in a year, several years, or a decade in the future. The nimbleness of ESOPs gives owners breathing room regarding when they exit.
ESOPs are especially appealing for business owners who want to exit the business but have a hard time letting go of it. When selling to ESOPs, owners can leave their businesses gradually. At the same time, properly created ESOPs can allow owners to remain as president or CEO even after selling all ownership to the ESOP Trust.
The most tangible advantages of ESOPs are relevant to tax consequences. Consider the four following tax advantages ESOPs provide owners:
Another rarely considered advantage of ESOPs is how well they serve owners who want to take care of their employees, continue the company’s culture, and keep the company in the community.
Owners who choose an ESOP as an Exit Plan indirectly make their employees their successors. The employees continue to be led by the existing management team, making the very people who helped build the company, its culture, and values the new owners. ESOPs can be a perfect Exit Path for owners who know their employees’ capabilities well.
In our next article, we’ll look at the flip side of a sale to an ESOP: the disadvantages.