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Even after recognizing the many advantages of selling to an employee stock ownership plan, some shareholders of closely held companies still hesitate to move forward with an ESOP sale.

Sellers may fear that long-held relationships with their preferred tax professional, accountant, attorney, banker, or other service providers won’t hold up to the new needs of an ESOP company… but much of that fear is unfounded.

After all, unlike selling to a third party, an ESOP sale can actually help maintain long-term relationships with counsel, consultants, and advisors — often with a little extra communication and expert guidance.

You may have built decades of goodwill with these folks and feel a genuine sense of loyalty to vendors and service providers. And who would want to turn their back on the professionals who’ve helped you build and grow a thriving business over the years?

But does becoming an ESOP company require a whole new, specialized team? Do you need an accountant or tax preparer with significant experience serving ESOPs?

You Don’t Have to End Business Relationships to Become an Employee-Owned Business

Becoming employee-owned by selling to an ESOP affects certain aspects of your business, and you will need some specialized help along the way. But in most cases, after the business transition, ESOPs enjoy tremendous continuity in their professional and consulting services rosters.

That’s not to suggest that your tax preparer, accountant, or lender won’t experience any differences… but in most cases, your capable professional teams can keep serving your ESOP-owned company with great success. When you partner with seasoned consultants like the experts at ESOP Partners, your trusted teams get just the education they need to continue supporting you.

Specialized Services Are Often Needed for ESOP Planning and the Sale 

It’s important to understand that an ESOP sale is a unique process, and that because an ESOP is not just a business transition tool but also a qualified retirement plan, ESOPs are subject to regulation by the Employee Retirement Income Security Act of 1974 (ERISA).

What will that mean to you and your business before, during, and after the ESOP sale?

No one likes to hear “It depends,” but in this case, it does. It depends on who you choose to work with as your ESOP sell-side advisor.

As you prepare for the ESOP transition, you’ll likely need the following professional capabilities on your side:

  • An ESOP-specialized attorney to ensure all legal documents are in compliance with regulatory requirements
  • A knowledgeable lender that understands the way an ESOP sale affects a corporate balance sheet
  • An accountant or CPA capable of providing reviewed financial statements
  • A tax preparer who is aware of ESOP-specific forms and filing requirements
  • A human resources professional who understands the value of the ESOP as a benefit, and who can help communicate to employees with clarity and enthusiasm

Why is it Crucial to Have the Right People in the Room?

Done right, an ESOP transition can meet a lot of individuals’ needs. The selling shareholder(s) can take advantage of the wealth they’ve built in their business and start living their dreams sooner — without having to walk away from their professional role like they might if they sold to a third party who chooses to make major leadership changes. An ESOP can give the seller the flexibility to choose. It can also help them set the company up well for future growth, as a cash-advantaged corporate finance tool.

But without the guidance of experienced advisors and professionals, you run the risk of a design and plan document that misses the mark, creating problems with corporate cash flow, employee stock repurchase obligations, regulatory compliance, and even the future of the company.

How to Get Your ESOP Right from the Start

When you work with an experienced team, your sell-side ESOP consultant is your point person, and you won’t have to replace your trusted team of professional service providers.

Look for an ESOP consulting team that welcomes your trusted advisors into the conversation. At ESOP Partners, for example, we often take the time to educate and train CPAs and tax preparers to ensure they’re fully aware of requirements, and ready to take them on. Forms, filings, accounting standards — things will be a little different going forward, but your ESOP consultants should be ready to help you maintain continuity if you want it.

ESOP consulting teams should be comfortable facilitating conversations with lenders to provide clarity and a smooth borrowing experience. In our experience, lenders and bonding agents that haven’t yet worked with an ESOP company come to see the advantages pretty quickly with just a little education.

Your consulting team should also be able to help you vet and choose an attorney who specializes in ESOPs for the transaction. Does this mean you have to terminate your relationship with your current business lawyer? No — aside from the ESOP sale itself, your attorney should be able to continue serving your needs.

Plus, an ESOP can help secure the company entity in perpetuity — actually strengthening those long-term relationships from your professional service providers’ points of view. Selling to a third party rarely provides the same opportunities for business continuity.

The same thing goes for your HR professional. They’ll have lots to learn about shaping and supporting an ownership culture, but the right ESOP advisory is there to help with guidance, education, training, and support materials.

One important professional the selling business owner should certainly include your wealth advisor. While selling to an ESOP guarantees fair market value for your business — rather than a potential premium some third-party buyers may bring — your wealth advisor’s recommendations for terms, and structuring and scheduling payments can be important in the long run for your personal tax liabilities.

Look for an ESOP Advisory that Understands Your Goals & Values

Consider this: not all ESOP consultants share your interest in the long-term success of your business — especially after the sale. So it pays to do your research and get an idea of the longer-term outcomes of an ESOP advisory’s past transactions. Are they still employee-owned? Are they still in business? Request customer references and make those calls.

At ESOP Partners, we specialize in both sell-side advisory for selling shareholders and third-party administration services for ESOPs. Our depth of TPA experience means we know what it takes to start off an ESOP on the best possible footing for long-term success. Our horizon for the ESOPs we help establish and implement is much, much longer than the sale date. 

We can also help you, your leadership team, and your employees better anticipate the ways employee ownership will impact your business. In fact, you can start exploring answers to that question right now when you download our free eBook, What to Expect After the Transition to an ESOP Company. Click the link below to get your copy — and answers to your questions.

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