ESOP Tips for BEI Members

M&A Isn't Always the Answer

Exit strategies are often all-or-nothing decisions. But many owners would sooner punt on a great offer than leave their businesses behind. Even if they ultimately settle for a third-party or private equity transaction, the capital gains tax burden can often be painful.

In these instances, employee stock ownership plans offer meaningful, customizable alternatives to third-party and private equity transactions. A well-crafted strategy can help satisfy owners’ liquidity and diversification goals, while creating stronger, independent companies in the process.

Broad-Based Benefits

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Leveraged ESOPs help shareholders unlock equity value, while offering meaningful incentives to their companies and employees.

Tax-Efficient Diversification

By reinvesting their sale proceeds in a qualified replacement property, selling shareholders can defer and potentially eliminate capital gains taxes (1042 rollover).

Continuity & Potential Upside

Post-transaction, a company’s board operates the business. Selling shareholders often maintain salaries and meaningful roles in the business and may continue to hold stock.

Estate Planning Opportunities

Sellers can make gifts of retained interest to family and prepare for estate tax burdens at a time when a company’s value is depressed by leverage.

Enhanced Corporate Cash Flow

Leveraged ESOP transactions yield income tax deductions equivalent to the sale price, and 100% employee-owned companies can operate income tax-free in perpetuity.

Workforce Incentives

Employees gain a unique retirement benefit in the form of stock allocations. Studies show that employee-owned companies statistically outperform their peers.

Legacy Preservation

ESOPs enable companies to remain independent, stay put in local communities, honor long-tenured employees, and maintain enduring cultures.

Taking Chips off the Table

Partial leveraged ESOPs (30-49% sales) are common and enable selling shareholders to unlock net worth while retaining equity in their companies. Third-party deal financing, often without personal guarantees, is readily available. Post-transaction, business owners maintain leadership roles, while their companies remain independent and the free to entertain various transaction options.

Join CSG's David Blauzvern as he shares the nuances and benefits of partial ESOP transactions. This webinar was originally presented to BEI members.