Log in
Log in

Why Aren't More Companies Structured As ESOPs?

October 04, 2021 8:22 PM | Anonymous member (Administrator)

  • By Darren Gleeman, Founding Member and LWCN's SME on Employee Stock Ownership Plans (ESOPs) and Exit Strategies

  • One word – AWARENESS.

  • Most people have a pre-conceived notion of what an ESOP is all about. They have no idea how great or powerful ESOPs can be.

    Many advisors don’t understand why an ESOP is a great succession tool for their clients.

    Bottom line.  It’s because of the huge tax incentives and tax subsidies given out by the government.

    With an ESOP, an owner sells the company to their employees via a trust, and it’s paid for by government subsidies. This does not cost the employees any money. It is a gift to them.

    Here are the benefits in a nutshell:

  1. Similar to Private Equity, the company takes out a loan to pay the owner (no personal guarantee).  The owner pockets the proceeds and will not have to pay capital gains tax on this money. The gains are deferred indefinitely if structured correctly.
  2. If the company sells 100% of the company to the ESOP, the company will pay no taxes going forward.
  3. The US Government subsidizes the debt used by the company to pay the owner.
  4. The employees become beneficiaries of a trust which will own the shares and the company.  In essence, the people that get the equity will be your employees, not a 3rd party.
  5. The owners or their children/management team can also receive warrants to buy back up to 40% of the company in the future at a significantly discounted price.

If you're a business owner who is developing an exit plan and interested in one or more of the following:

  • The tax benefits mentioned above,
  • Preserving your legacy,
  • Doing something for the employees that helped build the business, and/or
  • Ensuring the business isn't moved when you transition out as an owner,  then...

Be sure to ask your team of advisors about the feasibility of creating and selling the company to an Employee Stock Ownership Plan (ESOP). 

Darren Gleeman is the managing partner of MBO Ventures.  The firm provides ESOP expertise and will invest its capital alongside company owners. MBO Ventures implements exit strategies, whether it's for family succession, a management buy-out, or a 100% sale to employees.  Learn more about Darren by clicking here.
Powered by Wild Apricot Membership Software