ESOP: ALTERNATIVE TO A SALE?
Posted on Dec 1, 2022 4:00am PST
For most companies contemplating some form of seller exit, an ESOP is often
discussed as an alternative strategy. Considering an ESOP today is more
fraught with some anxiety than ever before. Why? The answer is the spate
of recent Department of Labor court cases involving suits against trustees
and companies for overinflated common stock values.
An ESOP is still a viable exit alternative. Some of the key reasons follow:
- Owners often sell minority shares at a control premium if there is a Board
approved plan in place to ultimately dispose of a majority or all of the
shares over a short time frame.
- Employees do not use their money to acquire the shares.
- Selling shareholders can permanently defer capital gains taxes if they
elect IRC 1042 treatment (investment of the proceeds into a public entity).
- Selling shareholders may retain post-closing control of the business or
vest control in a selected management team.
- Sellers often seller-finance a portion of the purchase price, especially
to fill the void when bank credit is lacking. This seller financing is
at a market level return, usually plus warrants.
- Company gets full tax deduction of interest and principal for outside institution
debt financing the purchase.
- Employee interests and success are aligned with company. Retiring or departing
employees redeem their earned shares for cash.