This is Part 3 of a Series about planning for succession at the time that you decide to leave your business. Part 1 can be found here, Part 2 can be found here, and look for parts 4 and 5 in the coming weeks!
When a Business Owner is planning their exit from their business, through retirement, illness, or death, it is important to assure that their values and goals are being met with their Succession Plan. Today we’re going to talk about selling the business to an ESOP, or Employee Stock Ownership Plan. Essentially, an ESOP is a special type of retirement plan that is primarily invested in the Company. The ESOP option, like the three others, has its own pitfalls and advantages.
In order to qualify for an ESOP sale, there is not a specific number of employees or business value, but it’s generally reserved for businesses with more than 75 employees, and more than $6 million in value. Essentially, this is for small to mid-sized businesses, not for the typical small business. This has to do with the regulations set forth by the IRS and the Department of Labor that govern ESOP purchases and sales. If your business is that size, then it may offer many advantages to you.
One caveat in choosing a sale to an ESOP: this is the most complicated of the exit plans, and requires the most professional support. In addition to working with a coach to assure that the Team Culture, and leadership succession plans are in place, we recommend seeking out a Certified Public Accountant and Attorney that have specific experience in this field. There are many legal and tax challenges with this path.
GET YOUR DUCKS IN A ROW
Before considering a sale to an ESOP, Business Owners will have much more financial success if they have their business working without them. If you walked away today, would your team be able to operate with no further instruction? If you cannot answer “yes” to this with confidence, then your business is not as valuable. If you don’t have a solid management team that operates without you at the helm, proven systems and processes, a broad customer base, and growing cash flow and revenue, it’s time to take a look. A coach is the perfect person to advise you with these four tasks. With those accomplished, then a future ESOP sale is going to be much more profitable.
MEET YOUR FINANCIAL GOALS
As with a third-party sale, which we discussed last week, an ESOP sale has many financial advantages to the Business Owner, and with the right advice and plan, it has similar tax obligations to a third party sale. The Business Owner has to meet the goals of providing for their families, assuring a future for their community, and other financial goals. Be sure that in your plan these goals are met.
MEET YOUR VALUES GOALS
An ESOP, unlike a third-party sale that is generally only financial, is a way to meet values goals of the owner. Is your goal to preserve the legacy of your company in your local community? Do you want to be able to stay as CEO, President, or other Advisory role long after the sale? An ESOP sale will allow you to do that. Is one of your values goals to keep your long-term employees employed long-term by your Company? This is also an advantage.
Look for next week’s post on sale to employees. Don’t want to miss next week’s blog? Subscribe and never miss here.
Do you need help making a decision about how to exit your business? Do you need to create a plan to retire from your family business? Do you need to set up systems and processes to increase the value of your business? We can help. Contact us today to set up a no-cost, no-obligation business analysis today.