Benefits of Being an ESOP Firm

October 16, 2019 — Imagine you own a business, and it's profitable. While it's been great running the show, you'd like to be able to divest some of your time away without selling to a third party or introducing heightened risk to your company. What's more, what if you could motivate employees at the same time?

Employee Stock Ownership Plans (ESOPs) are often overlooked as a succession strategy, but they deserve your consideration. You can cash-out owner equity by offering shares of ownership to the employees themselves. By offering them a piece of the rock, it can be a win-win scenario.

The Opportunity

ESOPs allow business owners to monetize their business interests. They're also great for employees, serving as a qualified retirement plan. Employees can indirectly own the company through the ESOP. Financing is from a bank, and the debt is serviced by deductible retirement plan contributions from the company to the ESOP. Cash flow from the operating company goes to the ESOP on a fully-deductible basis. This includes both principal and interest. The ESOP then pays back the bank debt. What's more, in most circumstances the business owner can remain at the helm of the company.

The Benefits

ESOPs offer a number of significant benefits for business owners and their companies, including:

• bank financing for the buyout.
• no immediate taxable gain to the owner.
• a steady, regular cash stream to the owner.
• increased cash flow for the business.
• the owner stays at some level of control.

Contributions to fund any bank debt are tax-deductible by the operating company. Furthermore, many business owners would like to see their legacy continue despite their planned exit. ESOPs have an advantage in that selling owners can generate diversity and liquidity while retaining independence. Also, the owner(s) can maintain an active role past the transfer to an ESOP structure.

For more information about ESOPs, please contact Brian Sweeney today at 651-407-5856 or bsweeney@redpathcpas.com.