Due to a lack of succession planning, many businesses dissolve when the founder retires, becomes disabled, or dies. Traditional succession plans include going public, selling to management, or selling to a strategic investor (i.e., one who believes that acquiring the target company will enhance the value of its own business). But going public is not realistic for most closely held or family businesses; managers rarely have the capital to buy the business and strategic investors may not be willing to offer a fair price or payment terms and will often change or eliminate the target company's identity. Another method of business succession planning is creating an ESOP (Employee Stock Ownership Plan) to buy all or part of the business.
An ESOP is a profit sharing plan, designed to invest in the stock of the Company that sponsors it. Unlike other pension plans, an ESOP can borrow money and can buy stock from related parties. Together, these two special features allow business owners to design and structure a succession plan that includes selling the stock of their company to an ESOP. This is one of the most attractive aspects of an ESOP and as long as the transaction is "fair", the owners can design, structure, and implement the transaction, within a broad and flexible set of rules, to suit their own needs and goals and those of the business.
A few other attractive features include:
- Owners can sell stock without recognizing taxable gain on the sale.
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The company can receive a tax deduction for repayment of the debt used to fund the purchase.
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Both C and S corporations can implement ESOPs.
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Sellers can continue to exercise a substantial degree of control over the business.
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Managers and employees receive a stake in the success of their employer.
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Warrants and stock appreciation rights can be added to an overall plan, to tailor the plan to your company's specific needs.
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An ESOP transaction can be implemented as part of an estate plan, dramatically decreasing the tax cost of transferring ownership to family members.
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Properly structured, an ESOP owned company can actually operate completely tax free.
If you think these features sound like they may benefit you or if you just want more information on ESOPs as a business succession plan, please contact me.
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