Succession Planning Critical for Baby Boomer Business Owners

It is official: Pew Research reports until 2029, America’s baby boom generation is turning 65 at a rate of 10,000 a day.

Selling to an ESOP Transfers Assets & Liabilities in Stock Sale

When a business is sold to a third party, the buyer generally prefers to purchase a company’s assets rather than its stock, whereas the seller would rather sell the stock. As a result, the decision of asset sale or stock sale is often subject to the negotiation process. A very powerful benefit of selling to an ESOP is that an ESOP transaction is always a stock sale.

Selling to An ESOP Provides an 8% - 10% Expected Rate of Return

We have been exploring the many benefits of selling to an ESOP, including how selling to an ESOP can increase after-tax proceeds by over 40%, and selling to an ESOP enables a business owner to sell in 90-120 days.

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.

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