• Selling to an ESOP May be a Possible Exit Strategy for a Closely Held Business Owner
  • December 14, 2011 | Author: Anthony J. Jacob
  • Law Firm: Hinshaw & Culbertson LLP - Chicago Office
  • Transitioning a closely held company is not easy.  Owners of closely held companies often want to convert a portion of their 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 (employee stock ownership plan)  as a possible alternative.

    An ESOP is a type of employee benefit plan that invests primarily in employer stock. It provides certain tax advantages that are not generally available to other potential buyers. A sale to an ESOP is typically used as a succession tool for owners of closely held companies. An ESOP which buys closely held stock can borrow the purchase price at an attractive after-tax cost as well as 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 an 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 (6) company’s employee turnover statistics.