ESOP Tips for BEI Members

M&A Isn't Always the Answer

Business owners are often concerned about damaging their legacies, abandoning employees, or sacrificing potential multi-generational assets. Even if they ultimately settle for a third-party or private equity transaction, they'll likely incur a heavy capital gains tax burden.

Employee Ownership is a Meaningful Alternative

Employee stock ownership plans help shareholders unlock equity value, while providing meaningful incentives to their companies and employees. Leveraged ESOPs enable closely-held companies to sell equity, at a fair market value, to an employee trust.

This is not a stock option program. Instead, an ESOP is an ERISA-authorized, defined contribution plan.

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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).

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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.

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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.

Legacy Preservation

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

Best Fits and Use Cases

A growing number of exit planning advisors are embracing employee stock ownership plans. But when it comes to building a solid succession or exit plan, popularity is no substitute for a good fit.

Learn how certain private and family-owned companies are better positioned to maximize ESOP benefits and minimize the potential costs and downsides of a typical transaction.

Taking Chips off the Table

Partial leveraged ESOPs (30-49% sales) 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.