Is an ESOP Right For You?

There are approximately 1 million businesses owned by baby boomers. How are they going to transition their companies when they want to retire? Some will find a buyer or some might have family who take over.  

An ESOP (Employee Stock Ownership Plan) is another alternative, and in fact, in some situations an ESOP may be the real solution. 

A big advantage of an ESOP is that you can sell a part of your business and see how it works. This is extremely attractive from a tax standpoint because you only need to sell 30% initially. If it works, and you have good transition planning in place, you can continue to transition ownership. Employees are clearly part of this plan and a side benefit of an ESOP is improved employee engagement. 

Top ESOP Misconception:
“I will sell my business for less if I sell it to employees vs. going out to the market.”

Top Reality:

  • The price of your business is determined by an independent business valuation company.
  • If you’re selling only 30% of your business to start and your business is more successful as time goes on, you can adjust the pricing in later years.

 

Example: Value of business is $3 million; 33% is sold for $1 million to ESOP

                Before                After
$3 million in business $2 million in business
  $1 million in diversified U.S. stock
                                       WITH THE OPPORTUNITY TO SELL MORE!


You will want expert professionals to help you establish an ESOP including a business valuator, an attorney, an ESOP consultant for a feasibility study, (if it is financed) a bank for a loan to buy the stock, and an Actuary. 

An Actuary’s role is that of an advisor - making sure the plan stays in compliance with the law, filing the necessary government forms, producing plan documents, and helping business owners communicate with employees.   

Top 4 Things To Remember When Considering An ESOP:

  • Have a management team in place and prepare them to take over responsibilities when you retire;
  • Pre-plan for your retirement needs – determine the assets you will need;
  • Tap into your Company culture: Involve engaged employees who are already concerned about the success of the business;
  • Determine feasibility: The company must be financially stable to manage the loan that purchases the stock.

John Markley
President / Owner, Markley Actuarial  

 

 

Branded by North Star