Business owners often put off Succession Planning or even contemplating the thought of selling their business because they are not ready to retire or they have not identified or properly trained their replacements. They may also legitimately worry about the loss of control when selling to a third party. Including an ESOP in the Business Succession Plan enables a business owner to sell part or all of their company, Tapping into an Otherwise Illiquid Asset and Providing the Business Owner with Liquidity and Diversification, while remaining in control of the day-to-day operations of the company.
An ESOP Provides Control With Strong Corporate Governance
As part of the sale to an ESOP the company will install or strengthen its Corporate Governance Structure with an active board of directors. In cases where the business owner would like to maintain control, they continue to serve in their capacity as company President and chairman of the Board. Remaining in control, the owner continues to operate and manage the company in the capacity that they deem appropriate to meet the needs of the business and their personal goals. The transition of the day-to-day operations of the company to successor management will proceed according to the timeline and pace chosen by the business owner and the Board. This approach also allows the business owner to facilitate the business transition process and transfer control in a gradual, orderly transition.
An ESOP Provides Perpetual Ownership
The ESOP also assists the business transition process by providing a perpetual ownership structure to stabilize the company for years to come. Yes, the Board will still have to deal with management succession, but all public and private companies continuously face this issue and ESOP companies are no different. By taking the ownership transition off of the table, the Board can focus its efforts on its primary responsibilities: growing shareholder value, defining and implementing the strategic direction of the company, and management succession planning.
An ESOP Works Still Works When Successor Management is Not Yet in Place
The great thing about the ESOP solution is that a business owner can sell the company while working to find and build the appropriate successor management solution. This is why exit planners, business coaches, and other trusted advisors often partner with ESOP advisors to incorporate an ESOP into the exit plan. The independent ESOP trustee will work with the business owner to review the status of the successor management team and incorporate that into the ESOP transaction process. If successor management does not yet exist, the business owner will likely need to remain a part of the company until the team is in place.
Additional Control Protections
If the business owner provides financing for the transaction, additional control protections are often added in the loan covenants.
In addition to the ability to sell the company while retaining control, providing diversification and liquidity to the business owner, a business owner can Sell in 60-90 Days with an ESOP Built-In Buyer. Including an ESOP in your Exit Strategy also: 1) Increases the After-Tax Proceeds for the Seller, Providing a Greater Overall Return, 2) Pays For Itself by Eliminating Company Income Taxes and Increasing Company Cash Flow, 3) provides an opportunity for an Additional Rate of Return of 10-15%+, and 4) offers Additional Opportunities to Find Value for the Business Owners. If certain requirements are met a business owner can even Defer Taxation (or even avoid taxes altogether with a step-up in basis at death) with a Section 1042 Tax Deferred Sale of Stock to an ESOP.
These are just some of the reasons why Selling to an ESOP is the most cash and tax efficient method of transitioning a business.