ESOP Tips for Business Advisors

If you’re an attorney, an accountant, or a financial advisor, you probably have clients who could benefit from a liquidity event, but wouldn’t dream of selling their closely-held companies.

A leveraged ESOP may be the best option.

See how employee ownership strategies compare to other M&A options.

M&A Isn't Always the Answer

Whether business owners are concerned about damaging their legacies, abandoning trusted employees, or giving up on potential multi-generational assets, their fears are valid and, at times, stifling. Even if they ultimately settle for a traditional third-party or private equity transaction, the capital gains tax burden can often be painful.

Employee Ownership is a Meaningful Alternative

Employee stock ownership plans offer private companies and family businesses a tax-efficient, liquidity opportunity. A company’s stock is sold to an employee trust at a fair market valuation. The transaction is funded through commercial and/or seller financing (often without personal guarantees) and paid-off with pre-tax corporate cash flow.

This frees shareholders’ capital and provides 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.

Developing an ESOP Strategy

See how employee ownership strategies can help stakeholders attain their unique goals. Join Larry Kaplan, CSG’s Founder and Managing Partner, for a walk-through of the leveraged ESOP feasibility, structuring, and financing process in this brief video.

Based on real client interaction, this case study highlights the key considerations and strategies behind a successful employee stock ownership plan transaction.