Exit planning involves a strategic approach that can aid business owners in effectively transitioning away from their enterprises. A key element of this process is evaluating the possible tax advantages that an employee stock ownership plan (ESOP) can offer both the company and its owner.
If you’re a business owner looking to leave your business to retire or for some other reason, you might want to consider an ESOP. Here are three of the top benefits for such a plan:
Number 1: Building company value
ESOPs give sellers the ability to profit from building value in the company over many years and to gain liquidity to diversify wealth or buy other assets. ESOPs can also help circumvent a poor buyer’s market, help in the transition of franchisee ownership, be structured to take advantage of foreign tax treaty provisions, use other qualified plan investments, facilitate a going private transaction and more.
Number 2: Exit strategies
Baby boomers are retiring rapidly and over the next decade approximately 30% to 40% of businesses in the U.S. will be changing ownership as a result. ESOPs offer important benefits to help business owners make this transition.
They can facilitate family business succession planning and estate planning through the transfer of different types of assets to family members with different levels of involvement. And because ESOPs can be structured as a series of transactions, they can be either an intermediate or long-term exit strategy.
Number 3: Potential tax advantages
The tax code gives sellers the potential to defer capital gains tax while giving the company tax deductions on the transaction price over time, which can enhance cash flow and improve credit metrics. ESOPs are tax exempt and pay no tax on their pro-rata share of company earnings. In addition, only 30% of the business needs to be sold to the ESOP to obtain the tax benefits, and the business owner can continue to actively participate in and receive compensation from the business.
A financial advisor can help analyze the company’s financials, assess the feasibility of an ESOP implementation and work with your team of professionals, such as tax advisors and attorneys. This collaboration can help business owners fully understand the potential tax advantages and implications of implementing an ESOP as part of their exit planning strategy.
A financial advisor can work with you and your businesses’ relevant professionals to assess
the potential benefits of incorporating an ESOP into an overall exit strategy.