Employee Stock Ownership Plans – Part 2

AF: That’s where the leverage comes in.  Assuming your business is worth $2,000,000, and we will need an expert appraisal, a bank will likely be most willing to lend the ESOP the money to allow the ESOP to purchase all of your stock for the assumed $2,000,000.

C: Where are you going to find a bank that is going to lend my employees $2,000,000?

AF: Actually, it shouldn’t be difficult at all for you to find a bank willing to lend the money.

Let me explain the cash flow for a minute, because I want to show you how the government will put $700,000 in tax savings into the transaction to enable you to sell at an advantage and for your employees to repay the debt in a very tax efficient manner.

The steps are as follows:

Step One: You go to your bank and explain that you want to borrow $2,000,000 so that you can create an ESOP retirement plan to purchase your business.

Step Two: You pick up your banker from the floor and ask me to explain the transaction to him or her.

Step Three: I will explain to your banker that the income tax laws allow you to sell your business to a special type of retirement plan and if you invest the $2,000,000 in qualified domestic securities, likely top grade bonds, you likely do not have to pay any capital gains taxes on the sale.  At the maximum capital gains tax rate of 15%, that means that you save $300,000 over selling to an non-ESOP buyer.

Continue on to Employee Stock Ownership Plans – Part 3

Go back to Employee Stock Ownership Plans – Part 1