You may have noticed previous articles I have written on the virtues of ESOPs – Employee Stock Ownership Plans. An ESOP can be set up and used to purchase your business, thereby providing you, the business owner, an avenue for a successful business exit. ESOPs come with a ton of regulation and are not for everybody, but sometimes they make sense.
When is an ESOP a good Choice?
An ESOP might be a viable mode of exit if the owner(s):
- Want to avoid the disruption and indigestion involved with selling the business to an outside party.
- Are less focused on getting the highest selling price and more concerned with an orderly transition.
- Want to stay on and run the company for a period of time, at least sufficient to assure an orderly and successful transition.
- Prefer to take all or a portion of the proceeds via a long-term promissory note(s), allowing the deferral of income taxes via installment sale tax recognition.
- Want to defer or possibly eliminate all taxation by reinvesting the proceeds in qualifying investments including domestic stocks and bonds (C corporations only).
- Want to pass future company appreciation along to the employees.
Enough Talk – Real Life Example!
In April 2017, I was fortunate and proud to assist a long-term client sell their business to an ESOP. Envision an engineering firm started by two brothers with $30 thousand back in 2003. The ESOP purchased the business for $18.5 million, spread among 8 shareholders. The two brothers each received $2M in cash and another $4M in promissory notes bearing 12.5% interest. Additionally each of the brothers received 4.5% of the future stock appreciation via issued stock appreciation rights and are members of the ESOP. This deal far exceeded the brothers’ expectations and I am very proud to have pushed this transaction through to completion.
Is an ESOP Right for You?
Maybe, maybe not. But you should at least consider it. A B2B CFO® can provide significant value in helping you make that decision and facilitate a transaction, whether an ESOP or some other form of business exit is used.
Feel free to give me a call if any of the above piques your interest.