The most tax efficient and controlled ownership transition technique – an Employee Stock Ownership Plan or "ESOP" - has been around for over 35 years, yet it remains somewhat misunderstood. The idea of creating a buyer that is also a qualified retirement plan may not be inherently logical, yet it is this combination that makes the ESOP an ideal buyer for the right entrepreneur.
A recent Forbes article about ESOPs by Steve Parrish, an "Entrepreneurs" column contributor, cleverly titled his piece, "Spock would have hated ESOPs, but Spock never owned a company." Steve highlights several of the counter-intuitive, unSpock-like, concepts surrounding ESOPs, such as "the tax code is your friend." He taps into Congressional intent for the support of broad-based ownership through ESOPs, but also adds that "there is no requirement the company be egalitarian with its fortunes or its salaries. Pay for performance is still the rule."
Many private company owners regard their ownership transition as a means to an end. The complete sale of their business to a third-party is the closing chapter in their entrepreneurial venture and the ultimate pay day. Other owners are interested in transitioning more gradually, maintaining their legacy and rewarding those who helped create their success, in addition to realizing value for their businesses. Parrish's short article is worth a quick read for those owners looking for a gradual transition or those uncomfortable with the idea of selling to outsiders.
Click here to read the Forbes ESOP article.