Many business owners may be interested in gaining liquidity from the equity in their business but still want their legacy to carry on through the company’s future success. By selling all or part of their company to an Employee Stock Ownership Plan (ESOP), they can achieve both of these objectives.

Like other exit strategies, selling to an ESOP generates liquidity for the selling shareholder. ESOPs also allow the owner to choose whether to retain a role in the company or retire completely. Additionally, and perhaps the most compelling reason to pursue an ESOP transaction, sellers can potentially defer capital gains taxes on the proceeds of the sale.

The benefits to the selling shareholders are obvious, but is selling to an ESOP beneficial to the company after the transaction? The results of the 2014 Annual Economic Performance Survey of ESOP companies suggest it is. An impressive 93 percent of survey respondents affirmed selling to an ESOP was “a good decision that has helped the company.”

For the employees
The sale of a business can result in significant layoffs and the relocation of facilities. Pursuing an employee buyout sustains jobs, keeps the management team in place, and maintains the company’s role in the community.

For many companies based in small and mid-sized communities, such as ESOP-owned Paschall Truck Lines based in Kentucky, those concerns are particularly motivating.

“We wanted to find an exit strategy that would preserve employee jobs and maintain the company’s legacy,” says Tom Stephens, executive vice president of Paschall.“We ultimately determined that selling the company to an ESOP was the best way to transition the business for future success, keep people employed, and continue the legacy we’ve built over the last 40-plus years.”

Once employees understand their roles as employee-owners who have a vested interest in the company’s success, most ESOP-owned companies find that employees are motivated to work harder, work smarter, and be more cautious with expenses.

Seventy-six percent of respondents to the Employee Ownership Foundation 2014 Survey indicated the ESOP positively affected the overall productivity of employee owners. An increase in productivity directly impacts the company’s profitability. Seventy percent of respondents confirmed that their company’s revenue had increased.

For the taxes
Tax benefits available through the ESOP may allow the company to stockpile cash for capital needs and growth initiatives.

If the company is an S corporation, the corporation pays no federal income tax, because the ESOP is a tax-exempt entity. Managing the capital needs of an ESOP company requires careful planning, but if the company is structured properly and consideration is given for future repurchase obligations, an ESOP-owned S corporation is better positioned to make the highest and best use of cash.

A sale to an ESOP is a highly technical transaction that may not be appropriate for every company. When implemented and properly maintained, an ESOP can create great value for the seller, employees, and company as a whole.

Business owners interested in exploring an ESOP should seek the advice of a qualified advisor with significant transactional experience and knowledge.

Learn more about ESOP options by contacting Butcher Joseph & Co.