Employee Stock Ownership Plans

ESOP’s Fable – In Which the Small Business Owner Sells his Privately-held Company for Fair Market Value

Part 1 of 4

Perhaps you have heard this story as often as we have.

Business Owner has worked their entire career at building up their own business, and now wants to retire.  The problem is, no one is willing to buy them out.  The solution may be as simple as it is smart—sell the business to the employees.

In a Q&A format between Ainer & Fraker (AF) and a fictional Client (C), we will investigate how this may work:

C: I want to sell my business, how do I go about it?

AF: Are any of your family members interested in the business?

C: No, is that a problem?

AF: No, I was just narrowing the market for potential buyers.

C: That’s why I came to you, no one seems to want to buy my business, is there anything you can do?

AF: Yes, there is.  Have you ever heard of a leveraged ESOP buyout?

C: No, what is it?

AF: An ESOP is a particular type of retirement plan that is intended to invest in the stock of the corporate employer.  The government offers significant tax benefits to encourage corporate employers to allow their employees to purchase stock in the corporation.

C: You must be kidding if you think I am going to sell my business to my employees.  I worked too hard to build it up.  Isn’t there something else?

AF: Well, you told me no one wanted to buy your business.  If that is true, you don’t seem to have much choice in the matter.  The ESOP is a buyer you can create and cause it to buy your business.

C: You mean I either sell the business to this ESOP or let it die?

AF: I don’t see any alternative, do you?

C: Well no, but where are my employees going to get the $2,000,000 to purchase the business?

Click here for Employee Stock Ownership Plans – Part 2