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Business owners who are looking for a different sort of exit strategy beyond a traditional sale to a competitor or a private equity investor may want to consider an employee stock ownership plan (ESOP), which gives employees an ownership interest in the business. An ESOP allows owners to sell the whole business or stock in the company gradually while retaining control during the transition.

An ESOP is a type of trust that owns company stock on behalf of employees, typically through their retirement plan. An ESOP offers tax advantages for both the business and the owner selling their shares, and it can be financed in several ways.

Importantly, an ESOP transition offers a unique set of complexities for both the seller and the business itself that should be thoroughly reviewed with experienced ESOP advisors.

Establishing an ESOP involves careful strategic planning, research and execution. The process typically begins with a feasibility study to determine whether an ESOP is an option given the company’s current financial health and business goals. If it is, the company can create a structure for the ESOP that outlines stock allocation, employee eligibility and vesting.

You can then seek a professional valuation to determine the business’s fair market value and set stock prices. Often, with the help of a specialized ESOP investment banker, the company seeks a loan to help facilitate the purchase and transfer of shares from the business owner to the newly established ESOP trust.

In concert with the company’s feasibility study, the business owner who will be selling their shares also should conduct their own personal review with their tax, legal and financial advisors.��

Businesses can deduct their contributions to the employee stock ownership plan as well as any qualifying interest paid on loans taken out to fund the ESOP. Further, with proper planning, an ESOP trust is a tax-efficient ownership entity that could reduce the overall business’s income tax, offering savings to help pay down debt or reinvest in the business.

With proper planning, as the original owner you may be able to defer capital gains taxes, potentially even permanently, on the sale if you reinvest the proceeds in qualifying securities.

For employees, an ESOP means compensation can include interest in company stock, which will help their own retirement savings and give them the ability to take advantage of the appreciation of that stock over time as the company grows. Now with a staff that has an “ownership mindset,” the business may further benefit from a greater alignment with its employees.��

Companies have a number of choices for how to reward employees, foster loyalty and encourage strong workplace performance. ESOPs can be a powerful option because they show employees that there is a direct relationship between their work and their future. Employees see their personal financial well-being as tied to the long-term performance and health of the business. They are literally invested in the business and its sustained success through employee ownership.

If you are pursuing an ESOP, consider structuring it so that it qualifies for tax deferral, and choose financing that minimizes up-front costs. Ensuring the company is financially healthy when entering an ESOP also can maximize the financial benefits. It’s crucial to get experienced legal counsel and tax-advisory services to help design and implement the plan. Contact us to work with an experienced �۶���Ƶ Financial Advisor and �۶���Ƶ’s ESOP specialists.