Owner planning an exit? Have you considered an ESOP?

• Author: Higgins, Jr., James F.
• Position: Private companies - Employee stock ownership plans

As the Baby Boom generation continues aging, within the next two decades, the U.S. will witness a huge wave of business owners looking to sell their privately held companies.

The most common exit strategy for a private business owner is an outright sale to a third party. The 100 percent sale is usually a clean break (unless there is an earn-out or seller financing is involved), and a private sale often provides the highest available price for the company. However, it's often not so simple. Sometimes a suitable third-party buyer is not available. Also, the objectives of an owner may go beyond the almighty dollar.

A second proposition might be counter-intuitive; however, sometimes nonmonetary objectives come into play. Objectives might include: ensuring that the management team has a fair shot at taking over the reins; buying out some, but not all shareholders; allowing the owner to transition out of day-to-day management over several years rather than all at once; protecting the legacy and mission of the business so it can continue indefinitely; and ensuring that employees will not be left in the dust once the company's ownership passes hands.

A solution that allows a private company shareholder to achieve some or all of these objectives while providing shareholders with needed liquidity is the sometimes-overlooked Employee Stock Ownership Plan, or "ESOP." An ESOP is overlooked as a viable option because its pros and cons are either unknown or misunderstood.

About ESOPs

An ESOP is an employee retirement plan that can buy stock of the company sponsoring the plan. However, more than just a new employee benefit plan, an ESOP can be a "win-win-win" solution for the shareholder, the company and the employees. The government provides tax benefits to the ESOP as an incentive to assist private company shareholders with the ownership transition while also providing a potentially lucrative retirement benefit to the company's employees.

The ESOP essentially is an "inside" buyer of stock. It can buy as little or as much of the company's stock as the shareholders desire. Best of all, the ESOP stock purchase can be structured so that the selling shareholders can defer capital gains taxes on the sale of stock to the ESOP, and the company can take a tax deduction for both the interest and the principal of the debt that the company borrows to fund the transaction.

Structured properly, ESOPs provide owners with both liquidity and succession at a controlled...