What to Look For
If you’re an owner of a profitable business, you may be at a point where you’re not quite ready to sell to a third party, but want to find a way to take some risk off the table. An often overlooked and underutilized succession planning technique is a sale of company stock to an employee stock ownership plan (ESOP). The ESOP can be used to provide a market for the business owner’s shares in the company.
An ESOP is a unique tool that offers business owners a way to monetize their business ownership interests. The ESOP is a form of qualified retirement plan established for the benefit of the employees. The business owner sells the business to the ESOP where all of the participants of this qualified retirement plan (the employees) then indirectly own the company.
The funding for the stock purchase by the ESOP usually comes from bank financing. The ESOP is able to service the debt by deductible contributions by the operating company to the ESOP as retirement plan contributions. Cash flow from the operating company goes to the ESOP in order to fund the bank debt, on a fully deductible basis, including both principal and interest.
In most circumstances, the business owner can remain in control of the company.
ESOPs offer a number of significant benefits for business owners and their companies, including:
- Bank financing for the buyout
- No immediate taxable gain to the owner
- Steady, regular cash stream to the owner
- Increased cash flow for the business
- Owner stays in some level of control
- Contributions to fund any bank debt are tax-deductible by the operating company
Further, many business owners want the legacy of their company to continue after they exit the business. An advantage of using an ESOP in a sale transaction is that the selling owner can generate investment diversity and liquidity while still keeping the company independent. In addition, the business owner can still be active in the management of the company following an ESOP transaction.
If you would like to have a conversation about creating an ESOP for your company, or how you can take advantage of our tax savings ideas, please contact Jim Sacher at 440-605-7145 or firstname.lastname@example.org. Stay tuned for the next article in our series which covers tax savings through Section 199 deductions.