ESOP Surprises

ESOP is an acronym for Employee Stock Ownership Plan. 25 Jan

ESOP Surprises

ESOPBusiness owners spend their life growing the family business, but their wealth is locked up in their business and the owner isn’t able to enjoy the fruits of his labor.

An ESOP will allow him to sell part or all of the company, providing liquidity and diversification of his wealth while still remaining in control of the company. Yes, the owner can sell his company to an ESOP and keep control along with his salary, benefits and perks as long as he wishes.

A sale can be completed in as little as 60 to 90 days , and the capital gains tax can be deferred or eliminated entirely through an installment sale or by utilizing section 1042 of the tax code.

An ESOP can increase the after tax-proceeds and can provide a guaranteed investment return. An owner can pay the capital gains taxes in installments over many years, and earn interest on the money that would otherwise have been paid in taxes.

An asset sale can result in double taxes, and legal title to many of the assets such as leases, contracts, agreements, etc. must be individually valued and transferred. A sale to an ESOP will always be a stock sale, and is the most cash and tax efficient method of transitioning ownership of a business. It will simplify the process and will greatly increase the after tax proceeds.

Most advisors don’t understand ESOPs so they don’t recommend them.

They are usually salesmen who have their own agenda since their livelihood depends on the commissions and fees they can earn from selling their products, or providing their services.

Even the large ESOP facilitators have their own agenda. They are big banks and investment companies who promote C Corporation ESOPs that require multi-million dollar bank loans and multi-million dollar investment purchases.

A seller can obtain even greater benefits through an S Corp ESOP without the large bank loans and restrictive covenants. And he can earn the interest instead of the banks.

And he doesn’t have to lock his proceeds up in a stagnant investment portfolio for the next 20 or 30 years. He can defer the capital gains tax by utilizing a section 453 installment sale rather than a 1042 rollover and doesn’t have to sell 30% of the company to get tax deferral

You will be surprised at what your present advisors don’t know, or are not telling you.

And here is the biggest surprise of all. Uncle Sam will pay all the costs.

The check will be written by the company being sold, and Uncle Sam will provide the cash through tax deductions. The net cost to the owner can be ZERO.

About the Author:

Harold LubbockHarold Lubbock has had an exciting 65 year career in Financial Planning and Consultation from coast to coast across Canada and the United States, and around the world. He’s been an actuary, insurance salesman, investment dealer, financial consultant, estate planner, real estate broker and business broker over the years. President of two public companies, and the CFO of a third and  a founding shareholder of two banks, and three Life Insurance Companies, and Managing Director of a Merchant Bank. Involved in the valuation, purchase and sale of hundreds of businesses, ranging from small proprietorships to multi-million dollar public companies, he’s now semi-retired and living in Arizona.

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The Greater Phoenix Chapter of SCORE is a nonprofit association dedicated to educating entrepreneurs and helping small businesses start, grow, and succeed nationwide. As a resource partner with the U.S. Small Business Administration (SBA), SCORE offers mentoring for small business owners through a large network of volunteer mentors, local workshops, events, and tools.

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