Consider selling your business to employees

Business founders who have created, built or expanded an existing business and are looking to sell in this challenging financing environment could find many advantages in a sale to their employees.

Selling a business to an Employee Stock Ownership Plan (ESOP) or other forms of employee ownership provides substantial advantages to the seller. Some of these advantages include:

• Tax and estate planning benefits
• Retirement savings benefits
• Improved business performance through employee engagement

1. Tax and estate planning benefits.

Congress has recognized the value of employee ownership through ESOPs for many years and has created significant incentives for ESOP ownership.

Under certain circumstances, tax incentives allow a seller to defer the capital gains on a sale of stock to an ESOP. To qualify for this incentive, the sale doesn't need to be 100 percent of the company stock.

In addition to the usual advantages of deferring taxes, this benefit can be useful in estate planning.

Other characteristics increase the ability of the ESOP and the employees to fund the buyout of the company founder. An S-Corporation, which is 100 percent owned by an ESOP, is able to defer most tax on income until the employees sell their shares in preparation for or upon retirement.

The cash saved from the deferral of tax can be used instead to repay debt or fund business growth.

2. Retirement savings benefits.

Employees of an ESOP-owned business have a special opportunity to create substantial retirement security through the increase in value of the company and their ownership interests.

These retirement benefits are enhanced through the ability of the company to make greater contributions to the ESOP than can be made to most other qualified retirement plans.

Employees in employee-owned companies can share in business success and provide better funding for their retirements.

3. Improved business performance.

The continued success and growth of the business created by the founder can be substantially improved through employee ownership. Employee-owners have more incentive to:

• Understand the business
• To fully engage their talents and energies
• To push for innovative ideas and improvements that support business success.

People usually treat things they own with special care and employee owners of businesses are no exception.

With more than 10,000 ESOP businesses in the United States, history has shown the combination of business ownership and management practices that promote ownership thinking and employee engagement creates substantial improvements in the growth and performance of employee-owned businesses.

The ESOP advantage

Business owners looking to realize the value of the successful growth and development of their businesses while providing loyal employees the opportunity to continue that growth and performance may find many advantages in an ESOP transaction.

Many of the same advantages that make selling to an ESOP attractive to an individual business owner can also provide the opportunity to the employees of a corporate division to acquire their business from a large company parent.

Paul J. Karch is a shareholder and member of the Corporate Team in the Madison office of Godfrey & Kahn, S.C.