When business owners consider their business succession options, they often determine their objectives, analyze company resources and capabilities, and review strategic alternatives. Among these strategic alternatives are options such as a recapitalization or selling to a strategic buyer. But there is another viable option: an ESOP transaction.
An ESOP – or employee stock ownership program – is a qualified “defined contribution” retirement plan sponsored by the company. In many ways an ESOP is like a 401(k) plan, but there are several key differences. Most notably, with an ESOP, employees generally do not invest their own money in the plan, and unlike other qualified plans, an ESOP can borrow money to purchase the stock to be held for funding the employees’ retirement benefits.
Reasons to Sell to an ESOP
An ESOP offers several benefits to business owners and employees, including:
- Creating an exit vehicle for a business where alternatives are limited or a gradual sale is preferred.
- Allowing the business owner to maintain an equity interest in the company and/or remain active in the business.
- Protecting the management team or the business owner’s children to be active in the business, thereby ensuring continued operations and protecting the business owner’s legacy.
- Rewarding employees by offering benefits based on the value of the stock of the company.
- Providing tax benefits via tax savings and cash flow benefits to the company and plan sponsor.
- Allowing employees to share in the growth of the company while maintaining the existing corporate culture and management structure.
- Offering an additional source of retirement savings to the exiting business owner.
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