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Brought to you by Tom Long
Solid Oak Consulting, LLC		 )
Employee Stock Option Plans (ESOPs) as an EXIT Strategy? Vol. 4; Issue 4
In This Issue
  • ESOP Eligibility Guidelines
  • Example: Third Party Sale vs. ESOP
  • Coming In The Next Issue

    • What if you could sell your company for cash, to a ready buyer, at fair market value and defer taxes on the sale? Suppose you could sell a majority stake in the business and still maintain control. Imagine financing the sale through a bank loan in which the payback of principal and interest were tax deductible. This is what happens in an Employee Stock Option Plan (ESOP) buyout. While ESOPs aren't for all companies, they can be an excellent strategy for many.


    		ESOP Eligibility Guidelines
    hands shaking over money

    ESOPs are a tax-qualified retirement plan like a 401-K or profit sharing plan. By establishing an ESOP, an owner can sell some or all of the business and elect to pay no tax on the sale. Or, the owner can sell a significant portion of their shares to diversify their net worth and still maintain control. An added benefit is that ESOPs are an excellent way to motivate and retain employees. Some owners have used the ESOP as a vehicle to create a tax advantaged means to create liquidity to acquire other companies.

    Here is what it takes to qualify for creation of an ESOP.

    • Eligible payroll of $500,000 or more
    • At least a five year operating history
    • A minimum market value of $3 million (typically)
    • C Corporation or S Corporation
    • Capable successor managers
    • Good revenue and earnings history with little or no debt and the ability to secure financing

    		Example: Third Party Sale vs. ESOP

    This example highlights the significant tax differences between a third party sale and an ESOP.

    Third Party Sale
    Sales Price = $3,750,000
    Transaction Fees = $ 262,000 (includes broker commission)
    Net Sales Price = $3,488,000
    Capital Gains 20% = $ 698,000
    Net Sales Proceeds = $2,790,000
    Taxes and Expenses = 27%

    ESOP Sale
    Sales Price = $3,750,000
    Transaction Fees = $ 90,000
    Net Sales Price = $3,660,000
    Capital Gains = $ 000
    Net Sales Proceeds = $3,660,000
    Taxes and Expenses = 2.5%

    Summary of the ESOP Process

    1. Set your goals and estimate the current fair market value of the business
    2. Review ESOP design and structure based on your goals
    3. Evaluate the impact of the transaction on the financial statements
    4. Retain ESOP experts
    5. Design your ESOP
    6. Negotiate financing with a lender (or other source of funds)
    7. Close the transaction
    8. Communicate the Plan with employees
    ESOPs create a ready market for stock that may otherwise not be liquid enabling the owner to convert illiquid stock into cash. Also, an owner could sell up to 99% of his/her stock and still retain control of the business.

    ESOPs allow employees to receive an equity position in the company they work for without investing any money. They receive allocations of stock as their retirement plan. They don't pay taxes on their allocations until such time as they receive a cash distribution.

    ESOPs are sophisticated and complex vehicles and they are not suitable for every company. However; for those that qualify, it is a worthwhile mechanism to investigate.

    Remember that ESOP professionals earn money from instituting ESOPs. They should not be used to evaluate your exit options. You should always use your trusted tax advisor to review the different exit strategy options. After all, every business owner's situation and personal goals are different.

    Always remember - It isn't the Price you get, but the Cash you Keep!

    		Coming In The Next Issue

    Don't miss the next issue of Exit for Success.

    Roadmap to a Successful Exit from Your Business

    Use the link below to read previously published issues.


    BizMACH is an association of highly skilled consultants, evaluation experts and merger and acquisition specialists. We take ordinary companies and create extraordinary value. Best of all, we only work with lower mid-market companies.

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    Tom Long
    Solid Oak Consulting, LLC
    522 South Elmwood Ave
    Oak Park, IL 60304
    708-524-0886
    telong@solidoakconsulting.com



    Tom Long is an Associate Accredited by the
    Institute for Independent Business International

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