Creating a Buyer for Your Company Stock with an ESOP
When you consider an exit strategy plan for your business, do you ask yourself any of the following questions:
- What will happen to my family members in the business if I sell control?
- What will happen to my key employees if I sell control?
- What will happen to my job if I sell control?
- Who is out there who will care about any of these issues that are important to me?
These are very logical and practical concerns of many business owners.
- Did you know that you can create a buyer for the shares of your company stock?
- Did you know that this buyer will purchase the amount of stock that you want to sell?
- Did you know that you can sell shares to this buyer and still control your company, keep your job, and maintain your business operations in virtually the same manner as prior to the stock sale?
The buyer that we are referring to is an Employee Stock Ownership Plan Trust. And you can create this buyer by establishing an Employee Stock Ownership Plan (ESOP) in your business. When this happens, you can sell shares to this trust and decide whether or not you want to give up control. Also, for certain businesses, there are tax advantages that further highlight this popular, but largely misunderstood strategy.
In total, ESOP strategies can allow for flexibility and a vehicle for diversification of an owner’s wealth, while also allowing for the gradual sale of the company stock.
Creating a buyer for the shares of your stock sounds almost too good to be true. After all, one will ask, where does the money come from?
Well, that is naturally a very good question. The money can come from a number of different places.
The first and most expedient source of money is from a bank. In this case, a bank loans your business money and your business turns around and loans that money to the ESOP trust. Just like that, you have money in a trust that is ready to purchase your shares of stock.
Will a bank make this loan for this purpose?
The answer is that it depends upon your business and current situation. Profitable businesses can attract this type of loan because the cash flow of the business is sufficient to ‘carry’ this ‘non-productive’ debt. Remember that the debt is not contributing to business expansion; rather it is being directed towards your personal account via a purchase of your shares of stock by the ESOP trust. An analysis of whether or not a bank will lend into this transaction is required before too many steps are taken.
However, there may be another way that money can be directed to this new purchaser that you created for your company shares. The ESOP trust can be ‘pre-funded’ over a number of years out of the cash flow of your business. In this case, each year you are directing cash into the ESOP trust and the cash remains in the trust until enough has been accumulated to purchase the amount of stock that you wish to sell.
This type of planning is very forward thinking and is usually a part of a larger exit strategy plan for an exiting owner. Once understood, an exiting owner may very well enjoy the prospect of accumulating proceeds for the future purchase of his shares of stock by the ESOP trust.
So we see that Employee Stock Ownership Plans allow you to create a buyer for the shares of your stock without involving an outside party (with the possible exception of your lending institution). With this knowledge, you can begin to assess whether or not an ESOP will work and you may begin to customize an exit strategy plan that is based on your personal goals and timeline.
Too few exiting owners understand that a buyer can be created for the purchase of private company stock. Knowing this small fact may encourage you to ask about incorporating ESOPs into your exit strategy planning in order to better improve your overall exit strategy plan.
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Creating a Buyer for Your Company Stock with an ESOP
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Copyright Henberger Group Inc.
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