Considering An ESOP Exit Strategy? | Exit Strategies | Rea CPA

Considering An ESOP Exit Strategy?

ESOP Exit Strategy | Rea CPA

When you choose to embark on an Employee Stock Ownership Plan (ESOP) journey, you’ll have the opportunity to sell all (or just a portion) of your own investment in the company to employees while keeping you in the driver’s seat to maintain continuity and control of the business.

Benefits of an ESOP

It’s an investment in your employees’ retirement. As a qualified ERISA-protected retirement plan, an ESOP allows eligible employees to receive annual allocation of your company’s stock. Stock that’s acquired by an ESOP is held in an ESOP trust and employees become beneficial owners of the stock. Additionally, the value of your participants’ accounts will grow tax-deferred.

It lets you retain control of your company. An ESOP won’t change the operations or management of the company – all that will continue to reside with you until you are ready to embark on the next phase of your professional or personal journey. Employees do not legally own your company’s stock and, due to the nature of the plan, can only vote on a few major company events, including the sale of company assets, mergers, etc.

It offers substantial tax benefits. The ESOP purchase is traditionally funded with pre-tax dollars, which means advantageous tax opportunities are available.

  • As an owner of a leveraged ESOP, principal payments made on your acquisition debt are tax-deductible.
  • Companies that are 100% ESOP-owned, and taxed as an S corp, are exempt from federal income tax, regardless of profitability.
  • Converting to an ESOP creates a market for you to sell your stock at fair value, which creates opportunities to take advantage of more favorable tax rates, when compared to selling your company’s assets to an outside third party. This includes the possibility that the sale of your stock could be tax-deferred or even tax-free if you reinvest in a qualified replacement property within 12 months of your sale date.

Your Journey Starts Here

Establishing a succession plan that’s beneficial to you and your employees is vital, and selling to an ESOP may be the right solution for both you and your company. But how do you know if this really is your ideal destination?

You wouldn’t start a journey without knowing a little bit about the route. The same is true with determining whether an ESOP is right for you and your company. An ESOP feasibility and structure analysis is essential when it comes to deciding on whether or not to embark on your own ESOP journey.

This tool will help you discover the total proceeds you will receive from selling to an ESOP, potential risks and opportunities, and your company’s future cash flow using different ESOP scenarios.

Want to learn more? Contact our experts at Rea & Associates.

By Paul Weisinger, CPA/ABV, CVA, CEPA (Cleveland, OH)