Business Exit Planning: 5 Classic Strategies + One You May Have Missed

Most business owners recognize the value of planning for building and growing a successful company.

It takes entrepreneurial thinking and strong problem-solving skills to start and grow a business, and your exit — whether for retirement or another reason — is just as important a phase in the lifecycle of your company.

As a business owner, your exit strategy plan matters not only to you and your family, but also to your employees, customers, vendors, strategic partners, and the community at large.

Some entrepreneurs include an exit strategy in their initial business plan. That’s a great idea, but it’s also vital to recognize when conditions change and other options may become more beneficial.

Creating an exit strategy business plan well in advance can give you the advantage of clarity in the planning process as you make strategic choices that can strengthen your position for a sale, merger, or other deal.

Number Nine - Benefit of Selling your Company to an ESOP










Benefit #9 of selling to an ESOP: It creates the liquidity event now. This enables shareholders to diversify and begin to access value prior to retirement. The ESOP cannot pay a synergistic premium. This enables shareholders to diversify and begin to access value prior to retirement. Selling to an ESOP is always a stock sale which is more favorable from a tax standpoint than a traditional asset sale. 

Additional key tax benefit;  The portion of a company owned by an S Corporation ESOP is not subject to. federal or state income taxation, increasing cash flow and providing the company with a competitive advantage. This means that S Corporations that are 100% ESOP-owned are not subject to any federal or state income taxes, increasing cash flow and providing the company with a competitive advantage. 

Is An ESOP Right For Your Company

Check out this brief animated video to learn more about ESOPs. 

What Are the Ongoing Duties You Should Expect for an ESOP Trustee?

A key step in the process of establishing and structuring an ESOP (employee stock ownership plan) company is identifying, vetting, and selecting a qualified ESOP trustee. 

An integral part of the ESOP Corporate Governance process, the ESOP trustee holds an essential role as the legal shareholder of the shares held by the ESOP trust. 

This shareholder position is a fiduciary role that involves numerous, critical responsibilities.

So, what are an ESOP trustee’s fiduciary responsibilities? What about other ESOP-related trustee duties?

Here, we’ll walk through the fundamental duties and responsibilities of an ESOP trustee:

  1. Satisfy ERISA fiduciary responsibilities
  2. Engage the independent ESOP appraiser
  3. Establish the annual ESOP stock price
  4. Vote ESOP shares to select the board of directors
  5. Manage assets of the ESOP trust
  6. Ensure plan documents are followed
  7. Thoroughly document decision-making processes

It’s hard to overstate the importance of choosing a qualified ESOP trustee, given the need for due diligence in every decision related to ESOP transactions. ESOP trustee responsibilities, when properly executed, ensure regulatory compliance and a healthier ESOP company. 

Number Eight - Benefit of Selling your Company to an ESOP










Benefit #8 of selling to an ESOP: It provides more ESOP after-tax payments than a sale to a third party. The ESOP cannot pay a synergistic premium. 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. In a stock sale, the seller is generally eligible for long-term capital gain treatment at the current long-term capital gains rate. The more common sale alternative, the asset sale, is generally taxed at the higher ordinary-income rate.  

Additional key tax benefit;  The portion of a company owned by an S Corporation ESOP is not subject to. federal or state income taxation, increasing cash flow and providing the company with a competitive advantage. This means that S Corporations that are 100% ESOP-owned are not subject to any federal or state income taxes, increasing cash flow and providing the company with a competitive advantage. 

Is An ESOP Right For Your Company

Check out this brief animated video to learn more about ESOPs. 

What Employers & Administrators Need to Know About ESOP Distribution Timing

Clear and comprehensive plans for the timing of ESOP distributions are essential to effective ESOP management. A written distribution policy complements the ESOP plan documents, and helps ensure that all participants understand your plan’s current distribution process. 

While there are clear ESOP distribution rules that govern the timing of distributions for terminated employees with vested ESOP account balances, there are also exceptions, which allow some flexibility. At the same time, these exceptions could cause confusion if distribution plans are updated without clearly communicating changes to participants. 

Many ESOP employers have questions about requirements for the timing of distributions, especially for vested employees who are not retiring, disabled, or deceased. Here’s what you need to know about the requirements for ESOP distribution timing, and how to ensure your plan for distributions is not only in compliance with IRC regulations, but is also clear and easy to understand for plan participants.

ESOPs Help Strengthen the "American Dream"

What is the "American Dream" and does it still exist? 

For some, this may seem like a dated term from the 1930s that promises unrealistic expectations in a modern (and expensive) world. Parents and grandparents share stories of when they were young and aspired to own a home, a car, have children and live the “dream.”

This phrase has become our ethos, a guiding belief system that many of us embrace in the United States. Regardless of our name, income level, background, where we live or where we work, we all have the same level of freedom and opportunity to achieve success and prosperity. Oprah Winfrey, Larry Ellison (Oracle Co-Founder) and Elvis Presley are three names that are widely associated with this concept. 

How an ESOP Helps You Offer Employees a Distinctive Qualified Retirement Plan

The competition to attract and retain the best talent possible is fierce and global — in every industry, and for businesses of all sizes.

Companies need to consider every angle to recruit and retain employees. 

Compensation is always an important consideration, and attractive retirement benefit plans are an important part of any competitive compensation package.

That’s just one more way an ESOP can help lend businesses a competitive advantage: An ESOP is a qualified retirement plan.

Recruiting Advantages as an Employee Owned Company

The landscape in today’s job market for hiring companies is difficult, especially with the unemployment rate at 6%, according to the Bureau of Labor Statistics. Unemployment rates reflect the continued resumption of economic activity that had been curtailed due to the coronavirus (COVID-19) pandemic. Job growth was widespread in March, led by gains in leisure and hospitality, public and private education, and construction. The rate is down considerably from its
recent high in April 2020 but is 2.5 percentage points higher than its pre-pandemic level in February
2020. 

One Major ESOP Taxation Advantage: An ESOP Company Pays No Federal or State Income Tax

When company leadership considers whether an ESOP is a good fit, they must carefully consider the pros and cons of the decision, including how transitioning to an ESOP may impact a company’s tax obligations — and how ESOP taxation rules may provide a competitive advantage to the company.

The portion of a company owned by an S corporation ESOP is not subject to federal or state income taxation.

Number Seven - Benefit of Selling your Company to an ESOP










Benefit #7 of selling to an ESOP: An ESOP transaction is always a stock sale at full fair market value. The ESOP cannot pay a synergistic premium. Selling part or all of a business to an ESOP enables a business owner to sell to a built-in buyer in as little as 90 days at full fair market value. There are many significant tax and cash flow benefits of selling to an ESOP. An ESOP also allows for a better-managed ownership transition, preservation of local jobs, and the maintenance of a company’s legacy in the community. 

Did you know? Employee-owned companies are 235% better at job retention. (NCEO)  

Additional key tax benefit;  The portion of a company owned by an S Corporation ESOP is not subject to. federal or state income taxation, increasing cash flow and providing the company with a competitive advantage. This means that S Corporations that are 100% ESOP-owned are not subject to any federal or state income taxes, increasing cash flow and providing the company with a competitive advantage. 

Is An ESOP Right For Your Company

Check out this brief animated video to learn more about ESOPs. 

Keep Your ESOP On Track and On Time
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