Guest post by Sue Crockett, Executive Director of Minnesota Center for Employee Ownership
Studies show that employee ownership is one of the best ways to protect workers and businesses in times of crisis. With 4 million baby boomer owned businesses in the U.S. looking to retire in the next 3-5 years, having a plan in place as to how you want to leave your business is imperative. What will be your legacy?
Business owners that spent their life building up their company with the help of the employees and community do not usually want to just walk away OR be faced with the threat that the company will be relocated, merged or closed down. They want to reward their employees and keep the jobs in their community; thus, employee ownership is a great option to consider.
Employee ownership models allow owners to: 1) capture market value with tax advantages, 2) enjoy flexibility and craft an exit strategy, and 3) anchor businesses in communities and retain good jobs.
What is an ESOP?
In general, an ESOP is a retirement plan for employees used to purchase stock from a business owner that creates a real financial future for them.
In 1974, Congress passed a law that created ESOPs – Employee Stock Ownership Plans. The law says an owner can sell some or all of their business (10%, 30%, 49%, 100%) to their employees. The employees pay nothing. The business takes on a loan from a bank or other lending source to pay the owner full fair market value for the business.
The Federal Government and the State of Minnesota both stipulate that “If your company becomes ESOP owned and meets certain criteria, the business may never have to pay taxes again on the profits for whatever portion of the business is owned by the employees.” Meanwhile, the tax savings pay off the loan. And once the loan is paid, what can your business do with all that extra cash? It can grow – new buildings, more employees, and expansion of the overall business.
What can your business do with all that extra cash? It can grow!
If you sell 100% of your business to your employees through an ESOP, you may also be eligible to defer paying tax on the sale. You can keep full control of the business, but now your employees have a real stake in the game.
So what are the advantages of an ESOP?
It is a flexible, tax-advantage tool for business succession
It is a way for the owner to take some, or all, the money off the table
It provides employees with a real financial future
Are there disadvantages of an ESOP?
An ESOP may not be for everyone – considerations for implementing an ESOP include the size of the company, value of the company, expense to implement and the repurchase liability it creates.
ESOPs are best suited to a company of 20 or more employees that is financially sound. Smaller companies may want to consider the alternative of a Worker-Owned Cooperative.
The Good News
Studies from Rutgers University show that companies that are employee-owned fare better in down economies and certainly have done better during the Covid pandemic. Why? When employees have a stake in the game, they want the business to succeed as it will not only benefit them in the long run but give them a sense of pride that they helped create that success. ESOPs create wealth equity for all employees no matter their rank in the company. A great legacy!
ESOPs create wealth equity for all employees no matter their rank in the company.
So you are ready to sell to your employees, now what?
You will need well informed advisors and service providers, including specialized legal, valuation, fiduciary, and possibly a lender as well.
You will also want to answer some questions like:
Have you had your company valued? This is an important step.
What is the current culture of your business?
Do you want to sell a portion of the business or 100%?
Final Thought.
If you are interested in having a conversation about the benefits of selling your business to employees, please reach out to Sue Crockett or the Peak Wealth Planning team.
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About the Author
Sue Crockett is the Executive Director of the Minnesota Center for Employee Ownership. In 2019, the Employee Ownership Expansion Network (EOX) began to create a network of State Centers for Employee Ownership across the country. The purpose of this grass roots effort is to provide education and outreach on the benefits of all forms of employee ownership to workers, businesses, and the communities in which they reside as well as being a hub for resources to business owners and their advisors.
The MNCEO was the second state center EOX assisted in opening when it was formed in early 2020. The mission of the MNCEO is to be the local unbiased “boots on the ground” hub to help guide MN business owners and their advisors on their options when starting their ownership transition process. You can save the work of researching on your own and turn to the Center for guidance on deciding if an ESOP is right for you.
About Peter Newman & Peak Wealth Planning
Peter Newman is a Chartered Financial Advisor (CFA) and president of Peak Wealth Planning. He works with individuals nationwide that have accumulated wealth through company stock, ESOP shares, real estate, or running a business. Peter applies his unique background to help clients achieve their specific goals and enjoy peace of mind.
Peak Wealth Planning offers personalized concierge services to meet your wealth management needs, including financial planning, investment management, ESOP diversification, retirement income, insurance, and estate planning. As a fee-based financial advisor based in Chicago, Peak Wealth Planning serves a select group of clients in Illinois and across other states.