For business owners who are seeking a partial or complete exit on a tax-advantaged basis, an Employee Stock Ownership Plan ("ESOP") may be an ideal structure. Subject to ERISA, an ESOP is an employee benefit plan that is designed to invest primarily in the sponsoring employer’s stock. ESOPs are typically used in the following scenarios:
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The business owner wants to monetize a portion of his typically largest and most illiquid asset, but doesn’t want to sell the entire company; |
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The business owner is proactive, and wants to establish a vehicle for a future exit strategy; |
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Two or more shareholders have goals and desires that are inconsistent; and
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The business owner wants to provide an employee benefit tied to company performance, while still achieving other goals. |
Attributes of companies that make ideal ESOP candidates are relatively stable cash flow, a high payroll base, the presence of second-tier management team, infrastructure to support an ERISA plan, and an employee-minded owner. For appropriate situations, ESOPs provide a way for the selling shareholder to defer, and in many cases eliminate, the capital gain on the sale of the interest. At the same time, subject to certain limitations, the Company can deduct both principal and interest in the repayment of the loan used to buy the selling shareholder’s stock.
Strategic Equity Group possesses significant expertise in this area. Let us help you assess whether your company would make a good ESOP candidate. Click here to learn more about ESOPs.
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