6 Reasons Why An ESOP Could Be Best For Your Company

An Employee Stock Ownership Plan transaction, or ESOP, also known as Stock Purchase Plan, or SPP, can maximize after-tax returns to sellers of a business and also helps to make the business more competitive, productive and attractive to high-value workers. Here are enumerated 6 reasons why selling to an ESOP can be the best for your company:

1. Tax Benefits for C-Corporation Businesses

If your company is a C-Corporation entity and it is sold, capital gain taxed paid to the federal and state governments can reduce sale proceeds by 23.5% or more (33.3% in California). Selling to an SPP allows the owner to potentially defer those taxes forever by re-investing the proceeds in qualifying securities, such as stocks and some bonds. The obvious result will be evident-after-tax proceeds of $100 million vs. $67-to-$76 million.

2. Increased Productivity

Many owners selling to an ESOP remain invested in the company through warrants (structured equity). Thus, they retain an interest in the future prospects of the business. Considerable research shows that employee-owned companies outperform competitors operating under other ownership formats, the main reason being the employees acting like owners. Waste is reduced as is friction between workers and management. Productivity rises and worker-generated ideas for improvement bubble up.

3. Advantage for S-Corp ESOPs

In this case, the S-Corp business doesn’t have to pay federal or most state income taxes. Thanks to legislation designed to encourage employee ownership. Employee-owners pay taxes when they withdraw their stock upon retirement or only on leaving the company, much like an IRA or 401(k). This enhances cash flow and allows S-Corp ESOPs to invest even more in growth. They make acquisitions and pay down debt taken on to form the ESOP. Because of this tax benefit and other factors, many former C-Corp ESOPs are getting converted to S-Corp and some smart private equity firms are gaining interest to invest alongside ESOPs.

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4. ESOPs Address Legacy Issues

Perhaps your name is on the building and your company is a valued corporate citizen in your community. A strategic buyer (competitor) might realize the greatest value by shutting down your operation, laying off your employees and shifting customers to his existing business. This pattern can occur in private equity deals too. ESOPs can preserve and indeed enhance your business’s legacy with employees, customers and communities, by enabling independence and financial well-being.

5. Post-Closing Disputes

Buyers attempting to withhold due money from a seller based on earn-out and other provisions of a sale agreement are on the rise with buyers attempting to set aside ever-enlarging percentages of the sale price as contingent compensation. Post-Closing disputes are far less common among SPP companies. Buyers and sellers essentially know one another. The seller often remains active and invested in the business. Distrust isn’t automatic.

6. SPPs Help Solve The National Retirement Savings Crisis

A recent study of S-Corp ESOPs conducted by EY’s Quantitative Economics and Statistics Practice (QUEST) found that they vastly out-performed the S&P 500 during the years 2002 to 2012. The employees who otherwise may not save anything for retirement often wind up retiring comfortably and with dignity.

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About The Author

Mary Josephs
CEO, Verit Advisors

Mary Josephs

Mary Josephs is the Founder and CEO of Verit Advisors. A nationally recognized leader, Ms. Josephs comes to us with more than 28 years of experience with ESOPs as a specialized solution-oriented succession and liquidity transaction for middle market companies.

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She has advised, structured, and closed more than 200 financings for middle market companies, representing more than $7 billion in senior credit and nearly $30 billion in enterprise value.

In 2016, Ms. Josephs was selected as one of the most influential women in mid-market M&A, by Mergers & Acquisitions magazine, and throughout the past 25 years has continually held leadership positions throughout the ESOP community including: chair of the ESOP Association’s Finance Advisory Committee, member of the ESOP Association’s Board of Directors, board membership for the National Center for Employee Ownership, Advisory Board member for Employee-Owned Corporations of America, chair of the ESOP Association’s Advisory Committees and lifetime membership of the ESOP Association’s Board of Governors.

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