For many businesses looking to develop a succession plan, an employee stock ownership plan (ESOP) may be the ideal solution. An ESOP allows a business to provide a secure plan that is in line with the business owner’s long-term goals and has the potential to generate tax advantages.
If your business is being sold to your employees, you may need to borrow to finance a portion of the transaction. Our team will work with you to determine the best solution for your situation and help you navigate the unique accounting, transaction structure, and regulations that come with selling an ESOP.
Getting financing isn’t an overnight decision. There are lots of options to consider and each comes with unique questions.
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An employee stock ownership plan, or ESOP, is an attractive employee benefit plan and corporate financing tool, which allows employees to become beneficial owners of the stock in the business. The structure of an ESOP can range from simple to complex. Typically, a business borrows money from lenders or investors, and then loans the ESOP trust funds for the purpose of acquiring shares. This type of plan can also provide the business with various tax benefits.
Learn more from The ESOP Association.
The advantages and benefits of an ESOP are varied depending on whether you are the employee/participant, an existing shareholder, or the employer.
An ESOP can provide an employee with significant retirement assets if the employee is employed by the company for a long period of time and the employer stock has appreciated over the years. Since the stock is allocated to each employee’s account based on a contribution by the business, the employee bears no cost for this benefit.
An ESOP can provide ready, current market for the stock of outside stakeholders providing liquidity not otherwise available. This feature can be used by participants, beneficiaries, major shareholders, or estates of deceased shareholders. This leveraging provides a way for a selling shareholder to receive cash.
An ESOP is mandated by law to invest contributions in employer stock and is the only qualified employee benefit plan which is permitted to borrow funds on employer credit in order to acquire employer stock. This provides flexibility for a business using an ESOP as a corporate finance tool. Another major benefit is the positive impact that results when employees have an equity ownership in the company.
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Structure, Rates, and Terms are dependent upon the credit profile of the borrower and unique to each transaction.
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