ESOPs Are Not a Fable - Consider This Proven Strategy When Creating Your Exit Plan

An occasionally overlooked business succession strategy is an ESOP.  ESOP is an abbreviation for Employee Stock Ownership Plan.  ESOPs are qualified retirement plans that invest principally in the stock of the sponsoring company.  An ESOP is governed by ERISA and all full time employees of the company must be eligible to participate in the ESOP.  The ESOP purchases stock from the selling shareholder using cash, a bank loan, or seller financing.  Because banks are reluctant to loan money directly to an ESOP, usually the company obtains the loan and then loans the money to the ESOP Trust on similar terms.  Tax deductible contributions from the company allow the ESOP to make payments on the debt.  An ESOP can help the departing owner achieve several objectives.  These objectives may include:

  • Cash to the departing owner

  • Leaving the business gradually

  • Providing employees with a stake in the future of the business

  • Keeping the business in the community

While an ESOP will not work in every situation, it can be a valuable exit planning tool as, in a sense, you create your own successor.