Often business owners who are interested in bringing liquidity to their holdings seek only a sale to disinterested third parties. And that frequently works out just fine for both the buyer and seller. But sometimes the personal emotional strings attached to the business, whether on the surface or not, are simply too strong to break the ties and turn control over to “the new guys on the block.” You may have heard the term “emotional capital.” Emotional capital is comprised of all the softer assets an owner has invested in his company: sacrificing weekends and evenings to develop the business instead of enjoying the company of family and friends, going the extra mile to save or develop an account, consistently forging better procedures, always stretching one more hour out of the day and one more day out of the week – the business of creating a business. After all, the entrepreneur often spends more time with his or her “business family” than his or her immediate family. And the “gap” between an outsider who is never exactly like you and is unlikely to treat the business like you treat it, the selling entrepreneur, is huge! But it can be bridged.
The ESOP allows you to stay involved.
The ESOP, or Employee Stock Ownership Plan, allows an owner to “sell” his stock and stay involved in the business. “Have your cake and eat it too,” some might say. It allows the owner to realize personal liquidity (turn the non-liquid, privately owned stock to cash) and continue to be involved directly in the business.
If you have faced the fact that one day you will not own your company, and you want the business to keep growing the great reputation, customer list, and excellent profits you and your team created, you should consider the ESOP.
The management and key employee team you put together over the years is a valuable and often irreplaceable asset of the company, part of the “emotional capital.” The use of an ESOP keeps this group in place while giving you, the seller, liquidity.
Substantial tax advantages.
The tax advantages of an ESOP must be considered. Whether your business is an S or C corporation, there are significant tax advantages allowed in selling to an ESOP that are not found in a sale to a third party.
What advantages? The biggest advantage is that the contributions from the company to the ESOP to pay for your stock are tax deductible ! There is no other program that permits you to do this. The company saves up to 40% of the purchase price by using before-tax dollars to pay for the stock.
Additionally, the capital gains tax on the sale of your stock to the ESOP can be deferred and even eliminated in certain circumstances. Dividends used to reduce principal on borrowed funds from either a seller or a bank are also tax deductible.
A feasibility study can help you decide.
In real-life sale situations, several of our clients have asked us to “dual-track” the sale of their company. That is, we go to the market looking for third-party buyers and at the same time prepare an ESOP feasibility study, comparing the results of both. Competition lets you, the seller, get the best results for yourself and the company.