Selling your business? Consider an ESOP.

• Author: Tama, Hugh
• Position: Private companies - Employee stock ownership plans

The U.S. Congress has legislated a plethora of tax incentives to encourage business owners to take advantage of employee stock ownership plans (ESOPs). By using an ESOP when selling your business, you can retain operating control while giving your employees a big stake in the business, get paid 30 percent or more of your firm's value and defer paying tax on that money when you invest it.

ESOPs were unknown until 1974; about 11,000 companies now have these plans. With more than 8 million employees covered by ESOPs, they have become the most common and popular form of employee ownership in the U.S., according to the National Center for Employee Ownership.

Is an ESOP right for your company? Consider the following pros and cons:

* Credible valuation of your business's worth. By using an ESOP, you get a credible valuation of what your business is worth, just as you would if you were giving it to an investment banker to sell. This means you're selling it to your employees at full market value. The ESOP gives you, the seller, cash for whatever percentage of the company you're selling. And the best part: the tax on the transaction can be deferred.

* May cost your employees nothing. If your employees lack up-front cash to put into the business, that's perfectly okay because the ESOP borrows the money from the bank to pay to the seller. Then, when the ESOP makes the payments to the bank to repay the money it borrowed to buy the stock, the whole payment becomes tax-deductible, which helps the company's tax situation overall.

* Avoid substantial capital gains taxes. Selling your business directly may incur substantial capital gains taxes. When you create an ESOP for the benefit of your employees and sell them a part of your business, the tax hit can be postponed.

* Reinvest the money tax-free. The repayments the ESOP makes to the bank are tax-deductible, as is the cash the business owner receives from the ESOP (if rolled over into a qualified investment.) The savings are substantial when you consider the traditional way of selling a business for, say, $20 million and having to then pay $9 million in taxes.

* ESOPs are extremely flexible. The flexible nature of ESOPs make them very user-friendly. You can cash out all of your shares at once, or you are allowed to sell your shares to an ESOP gradually over a period of years.

* Preserve your company's independence and reward those who helped make it successful. Understandably, you may not want to sell your...