If you’re thinking about retirement and want to sell your business, you might wish to consider the benefits of selling it to your employees via an employee stock ownership plan (ESOP).
Surely, you want to get a reasonable selling price.
Selling to a third-party buyer might not be as gratifying as selling to your employees in an ESOP.
After all, your employees probably have worked hard to help you build your company.
Admittedly, selling to your employees might not yield the highest price.
But an ESOP provides tax benefits for owners of private companies, and grants ownership opportunities and a retirement source for middle-class workers.
An ESOP is a qualified retirement plan – according to the Internal Revenue Code and the federal Employee Retirement Income Security Act
It does mandate investment in shares of stock of the ESOP business.
Employees can finance the purchase of the company by leveraging its assets, and either by borrowing from financial institutions or from the seller.
How it works
Basic checklist for an ESOP process:
— The company’s board of directors approves the ESOP approach and assigns an independent person to serve as an ESOP trustee.
— The company is appraised.
— The trustee negotiates the sale.
— The company can borrow money and lend it to the ESOP for the purchase of the business.
— The corporation must make tax-deductible contribution annually to the ESOP.
— The business can issue tax-deductible dividends on the stock held by the ESOP.
— Any loans are paid off by the trustee; often by the dividends.
— Parties receive noteworthy tax benefits – to the seller, the company, and the employees.
Pros of an ESOP
In addition to tax benefits, an ESOP also provides non-tax benefits:
— An instant opportunity to sell the company.
— The seller can sell the business instantly or over time.
— It’s an opportunity for the owner to sell the company without selling it to competitors.
— Employees get retirement benefits.
— It’s an opportunity for continuity – to avert bothersome issues by assuring no restructuring or layoffs to former loyal employees.
— Competitors don’t learn the company’s proprietary information.
Cons of an ESOP
Like other selling options, ESOP costs can be high:
— An ESOP does necessitate hiring financial and legal advisors for both the seller and trustee.
— Sellers should also hire a wealth-management firm, an experienced ESOP tax advisor and a transaction law firm.
— There are miscellaneous expenses for continuing management.
From the Coach’s Corner, related business-buying and selling tips:
Selling Your Mid to Large-Size Business? Beware of the Obstacles — With plenty of angst and working long hours, you’ve spent a lifetime building your company. Now, you’re dreaming about an exit strategy – selling out before your retirement for easy living. Perhaps you’ve exhausted so much time and energy growing your company you haven’t given any thought to the business-selling process. Here are recommended strategies.
Selling Your Company for Tons of Gold Takes Planning — Many startup entrepreneurs dream about an exit strategy – launching their business, being acquired and striking it rich. Here’s how to make it easier.
When Should You Develop an Exit Strategy? Now…Here’s How — You should always have an exit strategy in place – no matter what. Whether you’re just starting out or you’re a veteran business owner, you should always have an exit strategy.
7 Basic Questions to Ask Before Buying a Business — Depending on your situation, there are beneficial reasons for buying a business. It works for a person lacking business-ownership experience as well as for a veteran business owner. Perhaps you’ve been laid off, or you’re tired of working for a boss. With sufficient experience and training from the seller, you can create a new career.
Financial Tips for Taking the Plunge to Buy a Business — So you’ve decided to take the plunge in buying a business. Congratulations. I salute such bravery. Owning a business represents one of America’s great fundamentals — our free-enterprise system. You’ll have multiple financing options.
“Haste in every business brings failures.”