One of the most difficult times with regard to a business is determining what will happen with such business in the event the owner is about to retire and there are no family members who are willing or able to take over the business. There are a few ways the business owner can handle this situation, and one of those is an ESOP. An ESOP is the acronym for Employee Stock Ownership Plan, which allows employees to come into ownership of the business. This can be done several ways, such as through direct purchases, bonuses, or profit-sharing plans.
There are a number of benefits in forming an ESOP, particularly because it provides a ready market for the shares of the business. Closely-held businesses are typically quite difficult to value, and even if a value is determined, it is only good to the extent someone is willing to purchase the business, which is not always the case. An ESOP addresses these issues. Through a very thorough appraisal of the business, a fair value for the company is determined. In turn, this price is paired with an interested audience, the employees of the business. With an ESOP, the owner secures funds for his retirement and the employees begin to share in the profitability of the business.
Also, owners are usually quite attached to their business, and, as a natural instinct, owners often want to see the business continue after them. By establishing an ESOP, an owner is taking measures to ensure the owner’s legacy is preserved, the business continues, and that the employees are taken care of. For these reasons, an ESOP can be a great choice for business succession planning.
ESOP’s generally have no bright line rules for the size of the company appropriate for an ESOP, so there is a lot of flexibility in designing the ESOP. However, the business does need to be either an S Corporation or C Corporation. Given that an ESOP does not demand a complete sale of the business, it allows the owner to determine what percentage of the business may be sold to the ESOP, and the owner may pair an ESOP with other business succession planning strategies. By creating a hybrid plan, an owner can simultaneously provide for the business’ employees while ensuring the owner’s unique planning objectives are satisfied.
If you need help navigating your family business , contact the experienced attorneys at Goosmann Law in our Sioux City, Sioux Falls, Omaha, and Spirit Lake offices.