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Selling to an ESOP May be a Possible Exit Strategy for a Closely-Held Business Owner

Hinshaw Culbertson LLP - Chicago Office

December 13, 2013

Previously published on December 11, 2013

Transitioning a closely-held company is not easy. An owner of a closely-held company often wants to convert a portion of his or her shares into cash to reduce investment risk. An owner who is evaluating complete exit strategies should consider selling his or her shares to an ESOP among the possible choices.

An ESOP, or an “employee stock ownership plan,” is a type of employee benefit plan that invests primarily in employer stock. An ESOP provides certain tax advantages that are not generally available to other potential buyers. Sales to ESOPs are typically used as a succession tool for owners of closely-held companies. ESOPs who buy closely-held stock can borrow the purchase price at an attractive after-tax cost and also provide additional employee benefits to the company’s employees.

Selling some or all of a closely-held company to an ESOP offers significant tax incentives that are not available in traditional sales transactions. One key advantage is that an owner who sells a portion of the company to the ESOP can still retain control over the company.

When considering whether an ESOP is a viable and sustainable option for a company, the owner should consider the following: (1) value of the company; (2) company’s history of profitability; (3) company’s debt capacity; (4) strength of the current management team (and/or a management team succession plan); (5) number of employees at the company; (6) amount of the company’s payroll; and (7) company’s employee turnover statistics.


The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.

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