Financial Planning: Use an ESOP for Liquidity & Diversification

Posted by Aaron Juckett, CPA, CPC, QPA, QKA on Thu, May 30, 2013
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ESOP Liquidity and DiversificationAs financial advisors well know from working with clients to perform financial and estate planning, business owners can build a significant amount of wealth in the company they have invested their life creating and growing.  Unfortunately this value is accumulated in an otherwise illiquid asset, preventing a business owner from enjoying the fruits of his or her labor.  There is also the risk of having a large portion of wealth tied up in a single concentrated stock position. 

Including an ESOP in the Business Succession Plan enables a business owner to sell part or all of their company, providing the business owner with liquidity and diversification while remaining in control of the day-to-day operations of the company.  This option provides almost immediate access (Selling to an ESOP Enables a Business Owner to Sell In 60-90 Days) to all or a portion of a business owner’s personal wealth that is currently tied up in an otherwise illiquid asset.  It also reduces the investment risk of having all of their wealth in one closely held investment and enables the business owner to build a more diversified portfolio.

If all or a part of the transaction is seller financed, the rate of return on the seller note can also help further expand the diversification of their portfolio and further reduce their investment risk.  In today's environment we have seen seller notes with Fixed Interest Rates of Return of 6-7% or higher (with overall rates of return of 10-15%+), which can provide a very favorable rate of return in uncertain economic times.  Many business owners have found the overall ROR of a seller financed ESOP more favorable than the investment alternatives of real estate and the stock market in today's economic environment. 

Benefits of an ESOP as Business Exit Strategy eBook

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.


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Topics: Employee Stock Ownership Plan (ESOP), Business Exit Strategy

Aaron Juckett, CPA, CPC, QPA, QKA
Written by Aaron Juckett, CPA, CPC, QPA, QKA

Aaron is President and Founder of ESOP Partners and provides implementation, administration, and consulting services to hundreds of companies. He is a member of The ESOP Association (TEA) and the National Center for Employee Ownership (NCEO).

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