400 Meridian Street, Suite 201
Huntsville, AL 35801
256-539-8002
 |
 |
 |
 |
 |
 |
 |
 |
 |
ESOP: An Exit Strategy
By Rick Hempstead, CPA
(as excerpted from "Exit Strategies" by John Menke)There are various exit strategies available to owners of small businesses: selling the business to a competitor, selling the business to the management employees, or selling the business to all of its employees under the provisions of an Employee Stock Ownership Plan ("ESOP").
Most owners of privately held businesses are busy running their businesses and not focused on developing exit strategy. As a result, many owners of privately held companies are not familiar with the strategy of selling to an ESOP. However, there are many advantages of an ESOP buyout.
ESOP buyouts are flexible. You can elect to sell the entire business now, or you can elect to sell it piecemeal over a period of years. An ESOP sale can be structured as an all cash sale, or it can be structured as an installment sale. The seller can keep control of the company, even if you have sold a majority interest to the ESOP.
There are also tax advantages to an ESOP. The debt principal incurred to purchase the stock is repaid with tax-deductible dollars providing a tax deduction to the company. For C corporations, if an ESOP acquires 30% or more of the outstanding stock, the seller defers the capital gains taxes indefinitely when he or she reinvests the proceeds in qualified investments. Where the ESOP owns 100% of the stock of an S corporation, the earnings of the S corporation will be literally tax-exempt.
As an owner, you may not be looking for an exit strategy, but may simply want to diversify your investments. An ESOP can also provide a method for liquidating a portion of your holdings to diversify your investments.
Unfortunately, it is impossible to give comprehensive tax and accounting advice over the internet, no matter how well researched or written. Before relying on any information provided here, contact a tax or accounting professional to discuss your particular situation.