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When thinking about ways to sell your business, you are likely familiar with the most common strategies proposed by business advisors: selling to a third-party such as a private equity firm or a competitor, or selling to your family. What your business transition advisor may not have discussed with you is instead selling your business to an Employee Stock Ownership Plan (an “ESOP”).
What is an ESOP?
What is an ESOP? An ESOP is a type of a retirement plan that Congress created by providing very generous tax incentives to explicitly encourage business owners to sell some or all of their business for the benefit of their employees.
ESOP Exit Strategy
Like a sale to a third-party, a sale to an ESOP permits an owner to receive fair value for the sale of their stock. Unlike a sale to a third-party, an ESOP provides several ancillary benefits:
- Maintain the current culture in the business
- Benefit the larger community by keeping ownership and the business in the local community
- Material shareholder and corporate tax benefits
- Provide a meaningful benefit for your employees that is effectively funded by operations and tax benefits
- Flexibility to sell only the portion you desire so you can maintain control of the business if that is your desire
If any of these ancillary benefits appeal to you, an ESOP should be explored as a viable alternative transition mechanism. You can learn more about ESOPs and read some real case studies on sesesop.com.
You can also see real-life experiences of business owners who had the pleasure of sharing the news of an ESOP with their employees:
Commonwealth Fire Protection Company ESOP Announcement
In later articles we will explore some additional themes, such as:
- Tax benefits for the selling shareholder and the company
- Different structures for how to structure an ESOP transaction
- Valuation and debt capacity for ESOPs
- How ESOPs benefit employees