Why Selling to an ESOP May Be Better Than an Internal Ownership Transition or Sale to a Third Party

John D. Menke
Posted on: 03/21/18
Written by: John D. Menke

menkeesop_design.jpgThere are good reasons to consider selling your firm to your own employees through an Employee Stock Ownership Plan (ESOP).  No other alternative combines maximum financial advantage with the flexibility that enables you to customize the sale to fit your own particular circumstances. 

An ESOP enables you to sell your business outright or gradually in installments.  You can retain your executive role or delegate your responsibilities, freeing you up for family and leisure.  An ESOP can be your ultimate exit strategy!

Let’s look at the conventional alternatives.  What if you sell your business to a competitor or third party?  That would require an extensive due diligence process and the disclosure of confidential financial and operating information.  Also, many of your key employees are likely to be laid off when your firm is integrated into the buyer firm or downsized to reduce costs

Apart from these operational and personal considerations, however, selling to an ESOP, in most cases, is the alternative that gives you the best financial return.  Here’s why.

Cash Purchase Versus Seller Notes

Let's assume that the value of your company is $10 million, and you decide to sell it to a third party for all cash.  After paying a combined federal and state capital gains tax of say 30 percent (assuming a zero basis), you would be left with net proceeds of $7 million, which you could reinvest in money market funds earning less than one percent, in bonds earning less than four percent, or in public stocks that historically earn six percent on the average over the long term.

In comparison, if you are a C corp. or switch to C corp. status, you could sell your stock to an ESOP and receive $10 million in seller notes tax-free, and your seller notes could earn an all-in rate of return ranging from 13 percent to 20 percent or more.  Similarly, if you are a S corp. or switch to S corp. status, you could sell your stock to an ESOP in exchange for $10 million in seller notes, pay the capital gains tax on the installment sale basis, and earn an all-in rate of return on your seller notes ranging from 13% to 20% or more. 

About the Author: John D. Menke is President of Menke & Associates, one of the leading firms in the United States in structuring Employee Stock Ownership Plan transactions. 

Attend this free Live Webinar: The ESOP as an Ownership Transition Vehicle – Is it Right for Your Firm? Failing to effectively plan for ownership transition can sink an otherwise healthy architecture or engineering (A/E) firm. Unfortunately, so many A/E firm leaders are stuck because they don’t see a traditional internal ownership transition as a viable and they don’t want to go down the road of an outside merger or acquisition. So, they do nothing. An Employee Stock Ownership Plan (ESOP) can be a very viable transition planning tool that often goes overlooked by A/E firm leaders. This FREE webinar covers exactly what an ESOP is and how it can benefit your firm. You learn the benefits, the disadvantages, and much more so that you can evaluate whether this may be the missing piece that can make your transition plan a success.

Register Now!

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