Planning Your Exit
There are many ways for business owners to exit their organization. Ask owners what their options are and they will likely respond with the two most common strategies: passing it on to the next generation or selling the company to an outside party. However, for owners wishing to exit their Company in a manner that directly benefits the company’s employees while at the same time paying less taxes, one other possible strategy should be evaluated. That strategy, an Employee Stock Ownership Plan (ESOP), is a retirement plan that allows the company stock to vest to the employees over time.
Is an ESOP Right for my Business?
An ESOP strategy won’t fit every situation, but in the right situation, it can be a powerful exit option! An ESOP is, effectively, an employee retirement plan that is frequently combined with a tax-efficient, leveraged buyout. Company owners can choose between a fractional or total ownership ESOP. From a tax perspective, ESOPs have many attractive benefits. For instance, fractional ESOPS generally have tax deductibility of debt payments while 100% S-Corp ESOPs generally pay no taxes.
Companies that are good ESOP candidates typically have the following characteristics:
- Profitable and growing
- Have a strong management team in place
- Would like to stay independent
- Can finance its own growth
- Have an owner that is interested in generating tax-favored liquidity
As with any exit strategy, it is a good idea to begin planning well in advance of a transition to ensure your goals are met. Planning for an ESOP transaction requires budgeting and cash flow projections along with establishing a clear design and understanding of the process.
How DHJJ Can Help
DHJJ has more than ten years of experience working with ESOP-owned companies. If you would like more information on ESOPs or other types of Exit strategies, DHJJ’s Exit Planning group can provide insight on the different options and connect you with the resources you need to ensure a smooth transition. Please contact DHJJ at 630-420-1360.
