ESOPs

Liquidity with Control

An ESOP is an efficient mechanism by which a business owner can sell a partial interest at full fair-market value (FMV) and still maintain total operating control of his or her company. Only 30% of the business needs to be sold to the ESOP to obtain the tax benefits for the selling shareholders. This allows the owner to ease out of the business while maintaining its culture. It also protects the owner from “outside” money and its corresponding influences, which can sometimes conflict with the owner’s philosophy of how to operate the business.

Preservation of Legacy

The sale of a company to a third-party may be made to someone who does not view the company in the same way the owner does and who may have no concern for the welfare of the employees, the community, or the legacy of the company. Selling to an ESOP can preserve the legacy the owner has put his blood, sweat and tears into building.

Flexibility

An ESOP can be structured as a series of transactions, which can facilitate the transfer of a larger percentage of the business over time. In addition, an ESOP does not preclude a business from undergoing a later sale to an outside buyer or an initial public offering, should those exit alternatives become attractive. The stock sale effectuated through an ESOP is also reversible; the company may repurchase the ESOP stock as employees retire, eventually regaining 100% control.

Facilitates Sales between Shareholders

Remaining shareholders can use an ESOP to buy out partners wishing to exit the business. Often, the transaction works in the interest of both parties. The selling shareholders may qualify for the tax-advantaged treatment of the sale of their stock, while the remaining shareholders will benefit from the special tax treatment for ESOP financing that allows for the deductibility of payments on ESOP loans.

Alternative to a Dormant M&A Market

Some industries and certain businesses fail to attract sufficient buyer interest to complete an outright sale. In such instances, an ESOP can provide a good alternative exit option for the business owner.

Protection of Confidential Information

Under an ESOP, business owners can generally maintain confidentiality with regard to revenue and profit figures, owner’s compensation, employee compensation plans, proprietary advantages and other business secrets.

Improved Employee Motivation

ESOPs can help a company attract, retain and motivate talented employees. Studies have shown that companies that adopt an “ownership culture” with an ESOP have experienced productivity gains of 6% to 11%. Giving workers a stake in their companies can increase their dedication, improve their work effort, and reduce absenteeism and turnover. Employees now have a vested interest in the success of the company.