A business is more than just a business to an owner – it’s almost like another child. It’s taken years to develop it and build it. Much like it takes a village to raise a child, it also takes a team of dedicated and talented people to build a successful company. These dedicated employees pose a dilemma for the owner on the verge of retirement.
Eager to move on to a comfortable (yet active) retirement, an owner may be hesitant to sell the business to an outside party. Fortunately, there’s a way to reward your longtime staff members and sell your business. It’s called an ESOP, or Employee Stock Option Plan. ESOPs have exited in their current incarnation since 2003. Created by Congress, the profit-sharing plans are designed to allow for employee ownership of the company. They also provide some sizable tax benefits for an owner.
No taxes on the gains
Now every scenario is different, but I will cover some of the broad stroke benefits associated with ESOPs. The biggest? If you’re an owner, you don’t have to pay taxes on the gains if you sell C-corporation stock and reinvest the proceeds into the appropriate security. Yes, you read that right: There are no taxes on the gains. That amount could be significant, as the capital gains rate can range anywhere from 25-30%, depending on the state you’re located in, and other taxes such as Medicare.
Those kind of savings indicate why the structuring of a deal is often more important than the actual price tag itself. I’ve had many owners who enter into a deal with a preconceived notion of what their business is worth, and they won’t budge until they get that number. Not only is that a hardheaded approach, it’s also foolish. You have to establish the actual value of the company before you even consider setting a price. Even then, you can use vehicles like an ESOP to get that bottom line benefit that you’re looking for.
How it works
Essentially, an ESOP is created when an individual or a group has an interest in running a business. For example, a team of executives for a company may be willing to take over the business when the owner retires. They can create an ESOP to purchase the business, and then present it to their fellow employees.
This is a win-win-win option for all involved. Owners get their tax benefits, as I mentioned earlier, as well as the satisfaction of keeping their business “in the family.”
The executives who formed the ESOP are allowed to continue with the company they helped build, and maintain the practices that helped build their overall success. Employees get a stable management team at the helm, and a nice retirement/investment option in which they can reap the benefits of their own hard work.
ESOPs have something for everyone. And its only fitting that if the village helped raise the child, they should also profit from their efforts as well.
Rock LaManna helps printing owners and CEOs use their company financials to prioritize and choose the proper strategic path. He is President and CEO of the LaManna Alliance, and provides guidance on how to grow a printing business, merge with a synergistic partner, make a strategic acquisition, or create a succession plan. Rock can be reached by email at Rock@RockLaManna.com.