Don’t Take the Easy Way Out

Truth be told, most of us take the easy way whenever possible. There are those among us that choose to look beyond what is easy and take alternate paths. This hit home for me with my oldest daughter, Megan. She recently participated in the Basic Airborne Course at Ft. Benning, Georgia as part of her training through the United States Army Reserve Officer Training Corps (ROTC).

Only about two percent of ROTC cadets participate in the Basic Airborne Course. It is physically demanding (and there is the whole height thing as well). When she first mentioned it, I thought this too shall pass. After all, she is majoring in dietetics in college. I don’t expect that there is a big demand for dietitian paratroopers. But, Megan has never taken the easy way (too boring for her). HZ1540 Image of two doors with one reading easy and the other esop

For business owners, when it comes time to sell their business, they often take the easy way out – selling to a third party. The third party may be a competitor, a supplier, distributor or just an interested party. But, there are other alternatives that should be considered, such as an Employee Stock Ownership Plan (ESOP).

Many, if not most, selling owners will not even consider an ESOP. There may be some very practical considerations such as the business is transitioning to a family member, is closing or is too small for an ESOP. But, often times there are other factors, whether real or perceived, that prevent serious consideration of the plans.

Let’s highlight a few of the more common concerns:

(1)   Selling to an ESOP is complicated. There is no disputing the fact that there are some additional steps in selling to an ESOP. You have to establish a trust, write plan documents and summary plan descriptions and administer the program on an ongoing basis. However, these are the same steps with any retirement plan and do not have to be a daunting task if you engage knowledgeable advisors to guide the process.

(2)  An ESOP is just giving away the company to the employees. This statement is simply not true. In a typical transaction, the company borrows against future earnings to buy out the selling owner’s interest. Employees earn an indirect ownership interest through their labors in the form of a retirement benefit.

(3)  Selling to an ESOP takes a lot more time. Selling to an ESOP does not have to take any longer than selling to a third party. Many of the steps are the same, obtaining a business valuation, drafting legal documents and making sure the accounting records are in good order. The additional steps for an ESOP can be done in parallel.

(4)  An ESOP is a more expensive way to sell. Often times a selling owner will see the extra steps and big dollar signs at the same time. A careful review often finds that not only is the ESOP not more expensive, it is often the least costly approach. By selling to an ESOP, the owner can avoid hiring a business broker to assist with the sale. A business broker typically charges between three and seven percent of the transaction value. In addition, the favorable tax treatment of ESOPs helps offset incremental costs.

Megan got the Parachutist Badge when she graduated from the Basic Airborne Course. Business owners that sell to an ESOP get the satisfaction of knowing that they have helped preserve their legacy and benefited their employees through the sale of the company.

 ***

In addition to blogging here, I also tweet regularly about topics of interest to ESOPs. Click to follow me on Twitter –  @jlripperger.

Affiliation Disclosures

While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that none of the member companies of The Principal are rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.

Insurance products and plan administrative services are provided by Principal Life Insurance Company a member of the Principal Financial Group® (The Principal®), Des Moines, IA 50392.

HZ1540

t13091001eh