Many BBBOs have thought about ownership succession and estate planning for a number of years, and might have even discussed it with their professional advisors and management team. However, most BBBOs have not developed a written succession plan or formalized a methodology for valuing their company. This uncertainty can create stress for the business owner and may make it difficult for him to retain the key employees he wants to manage the company as he “slows down” towards retirement. A partial ESOP transaction provides a BBBO with the liquidity he needs to mitigate the risk of having a majority of his net worth invested in the equity of his company, while providing his management team a strong incentive to remain with the company and to continue to contribute to its growth. A partial ESOP transaction also allows the business owner to remain involved in the company and maintain the flexibility to later sell the remainder of his stock to the ESOP or directly to key employees, or to sell the entire company to a third party. A 100% ESOP transaction maximizes a business owner’s liquidity and a company’s tax benefits. Almost every 100% ESOP-owned company operates as an S corporation, allowing the company to operate as a tax-exempt entity which provides it with a tremendous competitive advantage over non-ESOP owned companies.
An ESOP is a very effective strategy for ownership and management succession as well as estate, gift, and charitable planning. Given a business owner with a desire to sell to insiders, an ESOP can operate, as described above, as a fully tax-deductible leveraged buyout while providing the selling shareholder(s) with additional tax benefits and a company’s employees with very generous retirement benefits. An ESOP is an appropriate planning strategy for many Baby Boomer Business Owners and an attractive alternative to traditional ownership succession strategies.