Our youngest daughter, Sarah, is graduating from high school tonight. As a result my wife and I are experiencing several things for the last time. As we reflect on the things that we are going to miss, our daughter is excited for the next chapter of her life enthusiastically choosing a college, a major, and a future career.
This reminds me of the famous quote from Alexander Graham Bell. When one door closes, another opens; but we often look so long and so regretfully upon the closed door that we do not see the one which has opened for us.
This sage advice works for business owners as well as prospective college students. One door that a lot of people look forward to is retirement. Yet, that can be complicated if you are the owner of the business as well as an employee. Many business owners believe strategies such as phased retirement may not be available to them, effectively closing the door.
An Employee Stock Ownership Plan (ESOP) may be useful for an owner looking to retire in phases. An ESOP is a qualified retirement plan that is invested primarily in the stock of the sponsoring company. Employees can earn an ownership interest through their employment. The selling owner is able to sell all or part of the company while effectively maintaining control.
There are several characteristics of the ESOP that make it a strategy for phased retirement. First, the business owner can elect to sell a minority interest to the ESOP. If they want to sell additional amounts later they can do that in subsequent transactions. This allows them to time their reduction in ownership with a potential reduction in time spent in the business, allowing them to retire on a more gradual basis.
In addition to potentially freeing up time, the sale to the ESOP generates cash that can be used to pursue other interests or shore up retirement savings. This liquidity can be generated without giving up control of the company.
Finally, an ESOP is an orderly sale over a period of three to seven years, typically. This gives the owner time to develop a management team that can effectively run the organization in his or her absence. This helps ensure that they will get the full value of the company upon the sale of additional stock and that the business can continue as an ongoing entity.
Retirement opens a door. An ESOP may help open that door for business owners.
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. t140515024t