Employee Stock Ownership Plans (ESOPs) are a popular and tax-effective way for entrepreneurs to sell their businesses, and they are a growing force in Missouri. The most recent data shows that Missouri ranked 11th nationally among all 50 states and the District of Columbia for the most ESOPs. But why?
Employee ownership seems to fit well, culturally, in our state. Many Missouri business owners donít want to sell to “the big conglomerate.” They are often closely held businesses that have been operated and managed by family and local community members for years. Their community roots are deep. These businesses are employee-centric with a focus on maintaining a strong relationship with the community, which makes an Employee Stock Ownership Plan an ideal way to keep the business local by transferring the value of the business to the employees over time.
Business owners can retain control of their company. This is particularly attractive to companies that are closely held because it allows the owners to turn their equity in the company into cash, while they can continue to retain both control and influence over the company.
Low interest rates are resulting in favorable leverage terms and relatively high prices being paid to sellers in ESOP transactions. Prices are often set based on the present value of future cash flows. Low interest rates translate into high present values for business owners. So, owners can receive full, fair market value in an ESOP transaction, similar to the amount that would have been received in a sale to a third party.
ESOP-owned companies are almost always set up to legally not pay any federal income tax. This means that the company has pre-tax cash flow to pay the purchase price to the seller over a relatively short period of time.
A great example of this is Emery Sapp & Sons, based in Columbia. Emery Sapp builds bridges and roads and does other heavy construction. This company was built over decades of hard work by its owner. Although it could have been sold to a big industry player, it was instead sold to its employees through an ESOP in 1999. During the following 15 years, its revenue grew tenfold, the value of its stock tripled, and the employees now have an average of $61,919 in their ESOP accounts, in addition to their 401(k) savings accounts. As an S corporation owned by an ESOP, Emery Sapp has been able to retain cash instead of using that cash to pay taxes. It has also been able to use that cash to expand its business, including locations in Kansas City, Springfield, and Joplin. It has also been able to invest in innovation. Recently, the company became the first contractor in Missouri to successfully build a new bridge deck next to an existing bridge and slide the new deck onto the old bridge abutments, which avoided a lengthy shutdown of the bridge that would have been costly to the local community.
An ESOP can be appropriate for almost any business, regardless of industry or whether or not the workforce is unionized. If you think that an ESOP might be right for your business, consult with your attorney to learn more.