Selling Your Firm? Is ESOP a Good Option? Yes



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.

ID-10040939After 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:

Private ESOPs Are Where the Action Is – in Economic Value, Job Growth — Private employment stock ownership plans (ESOPs) are thriving. That’s according to a study by a former advisor to the Simpson-Bowles bipartisan deficit reduction commission and a fellow at the American Enterprise Institute. Economist Alex Brill, who conducted 2012 study, found that ESOPs as S corporations grew their jobs by 60 percent over this past decade.

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.”

-Herodotus

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Author Terry Corbell has written innumerable online business-enhancement articles, and is a business-performance consultant and profit professional. Click here to see his management services. For a complimentary chat about your business situation or to schedule him as a speaker, consultant or author, please contact Terry.

Photo courtesy of Photostock at www.freedigitalphotos.net

Private ESOPs Are Where the Action Is – in Economic Value, Job Growth



Private employment stock ownership plans (ESOPs) are thriving. That’s according to a study by a former advisor to the Simpson-Bowles bipartisan deficit reduction commission and a fellow at the American Enterprise Institute.

Economist Alex Brill, who conducted 2012 study, found that ESOPs as S corporations grew their jobs by 60 percent over this past decade. Of course, such a rate of growth is really an anomaly.

Other private-sector employment rolls have been stagnant.

ID-10066167 Ambro“The unique strengths of employee ownership drove company gains and jobs in the past decade, while helping insulate S-ESOP businesses from the adverse effects of the recent recession,” wrote Mr. Brill in the study.

It’s entitled, “An Analysis of the Benefits S-ESOPs Provide to the U.S. Economy and Workforce.”

ESOPs are tax-exempt retirement plans that consist of company stock held on behalf of the company’s employees.

They are company-funded retirement plans that do not require any contribution from workers.

Congress first changed U.S. tax rules to allow S corporation businesses to be ESOP-owned in 1998. There are more than 11,000 ESOPs in the U.S.

Mr. Brill studied a decade’s worth of data from 56 ESOPs, and Labor Department figures from 2002 to 2009.

The study’s salient results:

  1. S-ESOP companies showed substantially more employment growth in the pre-2008 recession period than private businesses.
  2. S-ESOP companies regained momentum faster than other private firms after the recession.
  3. S-ESOP companies in the manufacturing sector particularly benefited from the S-ESOP business structure, which buffered manufacturers through especially challenging recent economic times.

It’s generally believed that ESOP workers are substantially more invested in the success of their workplaces. They know it will affect their own economic well-being.

A University of Pennsylvania study earlier showed that S-ESOP companies generate about $14 billion in retirement savings for their workers that otherwise wouldn’t have been possible.

If a company has a positive workplace culture, an ESOP is worth considering as a good exit-strategy for a retiring business owner.

From the Coach’s Corner, one of the nation’s most publicized ESOPs, United Airlines (UAL), was an exception to the success of the other 11,000 ESOP success stories.

UAL became an employee-owned public company, 55 percent of the shares, in 1994. Employees gave up some $700 million in wages and conceded some work rules. In exchange, the workers bought out the boss and stockholders.

But clearly since then, UAL has had a turbulent history. It’s been unprofitable with passenger-service issues and an unhappy workforce. In essence, UAL has taught us several lessons in strategic planning. (See Strategic Planning Lessons: Why United Airlines Was Forced to Merge with Continental.) 

“If you mean to profit, learn to please.”

-Winston Churchill 

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Author Terry Corbell has written innumerable online business-enhancement articles, and is a business-performance consultant and profit professional. Click here to see his management services. For a complimentary chat about your business situation or to schedule him as a speaker, consultant or author, please contact Terry.

Photo courtesy of Ambro at www.freedigitalphotos.net

Seattle business consultant Terry Corbell provides high-performance management services and strategies.