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Unlock Net Worth
Creates a tax-advantaged, liquidity event and diversification opportunity for selling shareholders.
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Free Cash Flow
Yields lucrative tax-breaks for the business; 100% employee-owned companies can operate income tax-free.
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Reward Employees
Full-time staff gain stock over time, which can provide stability and a chance to share in corporate growth.
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Sustain Legacies
Selling shareholders can maintain a meaningful role with their company and potential upside.
HOW ESOPs WORK
How do employee stock ownership trusts buy company stock?
An employee trust acquires shares on behalf of ESOP participants. A trustee negotiates the purchase price based on an independent valuation. Employees do not pay out-of-pocket for stock. Instead, the sponsor company secures financing and repays those loans on the trust's behalf.
How are employee-owned shares allocated?
Eligible employees receive share allocations proportional to their annual W-2 wages. In a leveraged ESOP, stock is usually parceled-out over multiple years. Similar to 401(k) plans, there’s generally a three-to-six-year vesting period for allocated stock. The details are determined before the plan is formed and outlined in the ESOP plan document.
When and how can employee owners sell shares?
In general, when an ESOP participant retires or departs a sponsoring company, all their shares are sold back to the plan sponsor. Shares are priced at a current valuation, and the sale is orchestrated by the employee stock ownership trust. Plan participants can roll their proceeds into another qualified retirement plan.
ESOPs AS M&A ALTERNATIVES
How do ESOP sales differ from other transactions?
ESOPs offer privately-held companies continued independence, unique tax advantages, and employee benefits. Post-transaction oversight of an employee-owned business rests with the firm’s board of directors, and selling shareholders often maintain meaningful roles.
Are certain companies better suited for leveraged ESOPs?
Leveraged ESOPs are industry-agnostic, but private companies with taxable income and at least 10 employees are generally better candidates. Common use cases include family business ownership transitions, management buyouts, partner exits, and partial liquidity events for owners who want to stay with their companies.
How do selling shareholders receive cash at close?
Many third-party lenders, including major banks and funds, help finance leveraged ESOPs. These loans are secured by plan sponsors on behalf of their employee trusts. Senior debt, without personal guarantees, is commonly used to provide up-front cash to sellers. Seller notes are also a standard ESOP financing component.
TAX ADVANTAGES
What is a 1042 Rollover?
An ESOP-exclusive benefit, this tax-deferral strategy enables selling shareholders to defer and potentially eliminate capital gains burdens on their sale proceeds. To earn the benefit, a seller must reinvest their proceeds in Qualified Replacement Property within 12 months of their ESOP transaction date.
Can employee-owned companies earn tax incentives?
Yes. When shares are transferred to an employee stock ownership trust, sponsor companies may earn state and federal income tax deductions equal to the fair market value of that stock. In addition, 100% ESOP-owned S corporations can become income tax-free in perpetuity.
Are employee owners entitled to tax benefits?
ESOP participants can roll plan benefits into other tax-deferred retirement accounts, including 401(k)s and IRAs. Rollovers must be completed within 60 days of a plan distribution. Otherwise, distributions and dividends are subject to standard taxes and early withdrawal penalties.
