Business Planning: ESOP
Employee Stock Ownership Plans

By Financial Advisor Peter Egolf

How can I sell my business and retire?

The next ten years are critical for business owners in the United States. When do you want to retire? What do you do with the business you’ve built? An Employee Stock Ownership Plan (ESOP) is an enticing exit option for many stable small to medium-sized companies with 20+ employees.

How does an ESOP work?

The company sets up a trust as an ESOP and contributes cash to the trust.

The trust then purchases shares of stock from the current owner(s), or the company issues new shares for the ESOP to purchase. If the company lacks the cash to do this upfront, the ESOP can take out a loan for the share purchase, and then the company contributes money to pay the loan.

Employees of the company receive shares in the trust (ESOP). These shares are provided based on pay and vest upon years of service. When employees leave, the company will buy back the stock from the employee at fair market value.

What is the cost?

It depends, but it isn’t inexpensive. A typical setup would cost around $100,000 and is highly specific to your circumstances.¹

What is an example of an employee-owned company?

The largest employee-owned company is Publix.

What are the benefits?

• The owner has a known party to purchase and maintain the business moving forward (their employees).
• C-Corps can receive tax deductions up to 25% of covered payroll for contributions into an ESOP and contributions made to pay interest on an ESOP loan are excluded from this limit.²
• S-Corps that are 100% ESOP-owned do not pay federal or state income taxes (not all states), which means the business has a competitive tax advantage moving forward.
• The owner minimizes the taxes on the sale of their business by making a stock sale under capital gains tax rates. This is often an advantage compared to selling a business asset, which would be taxed at ordinary income rates.
• C-Corporation owners can avoid taxes via a 1042 exchange by rolling over proceeds into qualified replacement property (e.g., US common stock or bonds). To qualify, the seller must have owned the shares for at least three years, the ESOP must own at least 30% of outstanding shares, and this replacement must be done at most 12 months after selling ESOP stock.³
• Employees gain buy-in to their company and access to employer-sponsored deferred retirement benefits specific to the value they create.

How do I get started?

The National Center for Employee Ownership⁴, Vermont Employee Ownership Center⁵ or Pennsylvania Center of Employee Ownership⁶ are good places to start. They can help you assess whether or not an ESOP is a fit for your company and situation.

What happens after the sale?

For business owners who have recently sold their businesses, we can help with the next phase: managing and investing the proceeds.

Many business owners have invested in the decades before selling their business. Still, they are often underprepared to manage a significant influx of capital or want someone else to manage their assets moving forward. If you recently sold your business in Vermont or Pennsylvania and are looking for investment management and planning, please contact me to set up a conversation.

1. National Center for Employee Ownership – How Small Is Too Small for an ESOP?
2. EisnerAmper – The Tax Benefits of an ESOP
3. EisnerAmper – The Tax Benefits of an ESOP
4. National Center for Employee Ownership
5. Vermont Employee Ownership Center
6. Pennsylvania Center for Employee Ownership