Selling your business is a complex and often emotional process that is best not rushed. Even if you’re in the early stages of succession planning, you’ve probably begun to weigh the various pros and cons of your selling options, including passing down your business to a family member or selling to a third party (we’ll cover this next month). Though often overlooked, there is a strong alternative that allows you to uphold your legacy, bolster your business, and reduce taxes. It’s an employee stock ownership plan (ESOP). An ESOP is a tax-advantaged vehicle that allows you to transfer your shares of the business to your employees. Depending on the structure and reinvestment strategy, you could indefinitely defer the capital gains taxes.
If you’re trying to decide whether an ESOP makes sense for the future of your business, consider these three points:
Considering ESOP tax advantages
To be eligible for an ESOP, a company needs more than 15 employees and an EBITDA of at least $750,000. ESOPs take a minimum of six months to plan and execute, making them best suited for those who are looking to slowly transition out of their roles.
Due to their long time frames and the possible 2022 increase in the capital gains tax, an ESOP may be an increasingly attractive option for sellers who want to manage the significant tax burden brought on by a sale. ESOPs also offer additional tax advantages to business owners, including diversifying their personal balance sheets as well as deferring, and potentially eliminating, capital gains taxes altogether. That’s some serious money to save!
Setting your business up to thrive
After all the years and hard work you’ve put into building your business, ESOPs provide you with a tax-friendly way to step away while laying the groundwork for your enterprise to flourish without you. Enacting an ESOP means your company keeps the same management structure and workforce you originally put in place. Because you prevent the layoffs of existing employees common with a third-party sale, you leave your business in the hands of people who already understand your company culture and are likely personally invested in the ongoing success of the company.
Preserving your legacy
It’s taken years of dedication and vision to turn your business idea into the reality it is today. But selling your business to third parties who could alter the course of the company can mean that your exit is the end of your business as you know it. When you sell your business to your employees, you don’t have to worry about potential buyers misconstruing your vision. Your legacy is safe with the people who helped to establish and maintain the work culture and philosophy.
ESOPs are as viable an option for selling your business as any other considerations you may have. They come with many major benefits for the business owner, the employees, and the company itself.
As one of only a handful of banks nationwide with a specialized ESOP Group, First American Bank’s financial advisors can help you plan early and ensure a smooth transition to employee ownership. Our accessible advisors are there to help you every step of the way.
Explore the ESOP option and contact a First American Bank ESOP specialist today.
Leaving Your Business in Good Hands: A Guide to Selling to Your Employees
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