C: Are you seriously telling me that the Internal Revenue Service will give me an extra $300,000 just to sell to the ESOP so that my employees can own the company?
AF: Absolutely, starting to sound interesting?
C: Yes, but no banker is going to lend 100% of the value of the business, what do we do about that?
AF: Well, I want you to take a deep breath and think carefully about what I am suggesting.
Step Four: You give the bank a security interest in the $2,000,000 in bonds that you have purchased so as to avoid the $300,000 in capital gains taxes.
C: Just what makes you think I am going to put my $2,000,000 on the line for my employees?
AF: Well, I don’t see how you have any choice. If you sold on an installment sale to your employees, and remember, that’s your only choice, all you have is an installment note and an ultimate tax liability of $300,000. Your risk is not increased by the ESOP, it is actually decreased.
C: What do you mean decreased, everything I have is on the line for the loan?
AF: Let me explain a couple of points. First, the business is the only source of funds to pay you or the bank. The ESOP has already saved you $300,000 over a cash sale. However, the real savings are for the employees. If your employees bought your company on an installment sale, how much would they have to earn to pay you $2,000,000 for your stock?
C: I don’t know, how much?
Continue on to Employee Stock Ownership Plans – Part 4
Go back to Employee Stock Ownership Plans – Part 2