How ESOPs Can Benefit Companies and Their Owners

As a profitable business owner, you may not be quite ready to sell your company to a third party, but would like to take some risk out of the picture. What are some options? One often overlooked and underutilized succession planning technique is the sale of company stock to an employee stock ownership plan (ESOP). The ESOP can be used to provide a market for the business owner’s shares in the company.

THE OPPORTUNITY

An ESOP is a unique tool that offers business owners a way to monetize their business ownership interests.  The ESOP is a form of qualified retirement plan established for the benefit of the employees.  The business owner sells the business to the ESOP where all of the participants of this qualified retirement plan (the employees) then indirectly own the company.

The funding for the stock purchase by the ESOP usually comes from bank financing. The ESOP is able to service the debt by deductible contributions by the operating company to the ESOP as retirement plan contributions. Cash flow from the operating company goes to the ESOP in order to fund the bank debt, on a fully deductible basis, including both principal and interest.

In most circumstances, the business owner can remain in control of the company.

THE BENEFIT

ESOPs offer a number of significant benefits for business owners and their companies, including:

• Bank financing for the buyout
• No immediate taxable gain to the owner
• Steady, regular cash stream to the owner
• Increased cash flow for the business
• Owner stays in some level of control
• Contributions to fund any bank debt are tax-deductible by the operating company

Further, many business owners want the legacy of their company to continue after they exit the business. An advantage of using an ESOP in a sale transaction is that the selling owner can generate investment diversity and liquidity while still keeping the company independent.  In addition, the business owner can still be active in the management of the company following an ESOP transaction.

For more information about ESOPs, please contact us today.