Selling to an ESOP Provides Full Payment at Fair Market Value

We have previously discussed how selling to an ESOP provides a built-in buyer that can purchase the company in as little as 120 Days. Another benefit is that the seller can sell to an ESOP for full fair market value of the company (but not more than fair market value) as determined by an independent appraiser. The protection provided by the Internal Revenue Code to engage an independent appraiser protects the ESOP participants and ensures that the full fair market value of the company is used in the determination of the sale price.

Selling to an ESOP Provides Additional Value for the Seller

We have been discussing some of the many benefits of selling to an ESOP including how selling to an ESOP creates a built-in buyer and how selling to an ESOP can increase after-tax proceeds by over 40%. In addition to the higher after-tax return, selling to an ESOP can provide additional ways to add additional consideration and benefits for the selling shareholder above and beyond the sale proceeds.

Selling to an ESOP Can Increase After-Tax Proceeds by Over 40%

When a business is sold to a third party, the buyer generally prefers to purchase a company’s assets rather than its stock for liability and tax reasons. Selling to an ESOP is always a stock sale which is more favorable from a tax standpoint than a traditional asset sale. When analyzing the purchase price, it is essential to consider the after-tax proceeds when comparing an ESOP transaction sale to a third-party sale.

Selling to an ESOP Provides Big Perk to Motivate Employees

Efforts to engage and inspire employees with gimmicky perks will result in very little if you get the company culture wrong.  Your Perks Aren’t Motivating Your Employees shares some examples of how management plans of kindness and good intentions often turn into perks to nowhere and lost capital.

Selling to an ESOP Improves Corporate Performance

We recently discussed how selling to an ESOP provides greater employment stability and increases job satisfaction.  It is important to note that job satisfaction is not significantly impacted by employee ownership alone. Job satisfaction and employee engagement are driven by having a meaningful ownership stake AND active participation in the decision making process. The NCEO's Research on Employee Ownership and Corporate Performance reiterates the formula of OWNERSHIP + PARTICIPATIVE MANAGEMENT = OWNERSHIP CULTURE

Selling to an ESOP Provides Employment Stability & Increases Job Satisfaction

We have been discussing the benefits of selling to an ESOP.  A review of existing research on ESOPs found that ESOP companies have greater employment stability. The studies found that the average employee tenure was "significantly longer" than their non-ESOP counterparts and that firms were more likely to adjust wages than the number of employees. It also found a mild increase in "job satisfaction, organizational commitment, identification, motivation, and workplace participation.” 

Selling to an ESOP Rewards Loyal Employees & Preserves Company Legacy

The article Legislation would encourage creation of more ESOP companies shares commentary from Van Meter and CarePro, two prominent Iowa ESOP companies, on Iowa House File 2085 – Iowa’s ESOP Initiative to promote selling to an ESOP. The article discusses the need for establishing incentives to sell to an ESOP and how selling to an ESOP rewards loyal employees and preserves the company legacy and provides a business owner with liquidity and diversification.

Selling to an ESOP Increases Cash Flow by Eliminating Income Taxes

S Corporation ESOP companies are not subject to income taxation (federal and most states), increasing cash flow and providing the company with a competitive advantage. Let me say that first part again. S Corporation ESOP companies are not subject to income taxation!

Selling to an ESOP Saves Local Jobs and Strengthens the Local Community

Every small business owner will face a time when they will need to sell their company. When a small business is put up for sale to a third party, particularly in rural areas, local jobs and the other benefits are at risk. Since an acquiring business may not have any ties to the local community, they could liquidate the assets of the company or relocate the company operations to a different location. This obviously has negative consequences for the employees and the community. 

Selling to an ESOP Enables a Business Owner to Defer/Avoid Taxation

The capital gain rate is now 20%. In addition, capital gain income will also be subject to an additional 3.8% Medicare tax. This rate makes an IRC Section 1042 Tax Deferred Sale of Stock to an ESOP more attractive than when capital gains were lower.

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