Manage Your Exit And Keep Control.
There is no mystery here. ESOPs provide sizable financial benefits to sellers. They reduce or even eliminate taxes on the transaction. If you sell your equity (company stock) to an ESOP you are not required to pay tax on the transaction. Conversely, when you make a traditional asset sale, you undoubtedly pay taxes at the highest rates.
The other compelling reason why a properly structured ESOP represents a superior strategy is that it creates the roadmap for management succession and an orderly ownership transition. Frankly, the company you spent your life building will be better equipped to soldier on. Consider the advantages:
- You set the selling price and terms (based on the company valuation).
- You receive top dollar for your equity.
- You control the percent of equity sold to the ESOP – selling is not an “all or nothing” proposition because you may sell whatever portion you wish and still remain in control.
- You can receive an annual income by re-investing your pre-tax dollars.
- You can diversify investments – many owners “lock their entire fortune to the business.
- You can accomplish liquidity and flexibility for estate planning.
- You control the sale and can facilitate an orderly management transition
- The company will have improved cash flow.
- Principal and interest on the ESOP loan is 100% tax deductible.
- Dividends paid to reduce the ESOP debt is 100% deductible.
- The company can refinance existing debt at a lower rate and is 100% deductible.
- It will have an easier time attracting and retain the best employees.
- It can make capital expenditures using pre-tax dollars.
- It will be able to complete future mergers or acquisitions with pre-tax dollars.
- It will have increased net worth and appraised value by rolling over existing qualified plans into the ESOP.
- It can defend against a hostile takeover through a voting block.
Yes, the Employee Stock Ownership Plans (ESOPs) are powerful tools. But like any sophisticated financial tool, they must be planned and structured properly. A poorly designed and implemented ESOP is nothing less than a nightmare; therefore, choose your administrator wisely.