ESOPs – They Work!!

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):

  1. Want to avoid the disruption and indigestion involved with selling the business to an outside party.
  2. Are less focused on getting the highest selling price and more concerned with an orderly transition.
  3. Want to stay on and run the company for a period of time, at least sufficient to assure an orderly and successful transition.
  4. 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.
  5. Want to defer or possibly eliminate all taxation by reinvesting the proceeds in qualifying investments including domestic stocks and bonds (C corporations only).
  6. 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.

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