What if you could sell all or a portion of your company to a ready and willing buyer at full fair market value, plus indefinitely defer all capital gains taxes while leaving behind a completely income tax exempt entity.
Employee Stock Ownership Plans (ESOPs) provide an opportunity for business owners or shareholders to exit their company utilizing an immediate or gradual tax advantage strategy. More importantly, ESOPs can be engineered for the continued success of the business. Often providing more money after tax in a seller’s pocket than any other transition option.
ESOPs are a qualified defined contribution employee retirement plan designed to invest primarily in employer stock of a sponsoring company.
The time to consider an ESOP would be any of the following reasons:
Owner retirement, investment divestiture or immediate cash.
Buy out of active or inactive partners or investors.
Divorces or estate sales.
Management buy-outs or take overs.
Owner diversification of stock concentration.
Refinance of existing debt to allow for the deduction of both principal and interest costs.
Reduce company debt load and increase corporate cash flow.
Owners desiring to keep company locally intact with existing employees.
The following criteria has proven to be extremely effective when deciding if you are a candidate for an ESOP:
Business owner who desires partial or full liquidity.
20 or more full time permanent employees.
Business value of $10 million or more or net income of approximately $2 million or more.
5-year history of profitable operations.
Strong second management, not necessary but definitely a plus.
An ESOP must follow all of the federal and state laws. The company must be run for the benefit of all shareholders including the ESOP. The seller and family may continue to work and receive reasonable salary with typical perks and benefits.
An ESOP will offer potential tax-free profits to the company. It is very common for the income tax savings alone to be greater than the sales price and over time have a positive impact on cash flow for the corporate group.
Some ESOP advantages are as follows:
Seller
Immediately allows for the sale of all stock or portions over time at full fair market value.
Seller may defer federal capital gains taxes or avoid them completely depending on structure.
Seller and family can retain reasonable personal salary, perks and benefits.
Ability to transfer company on seller’s timetable to family or key management.
The benefit of retaining personal and corporate legacy in the town in which the seller contributed, is in many sellers’ minds, important.
Financing ESOPs can be easier and many times more efficient for businesses than conventional financing.
The seller may maintain an equity interest in the future upside of the company’s growth.
Corporate Benefits
The company receives a dollar-for-dollar income tax deduction on the entire stocks sale price.
An ESOP company can become 100% federal and state income tax exempt.
ESOP companies out perform their peers with increased productivity and higher return on investment.
An ESOP increases employee retention, motivation, and loyalty.
Employee and Community Benefits
Employees enjoy an equity stake in the company.
Employees enjoy enhanced retirement benefits with no out-of-pocket costs.
An ESOP creates an ownership culture which improves employee satisfaction and creates a more enjoyable work place.
The company remains an important contributor to the community social and economic fabric.
As you can see, it makes sense to explore an ESOP strategy when considering the sale of your company. For further information, please contact me at 818-342-9950.