Does Selling to an ESOP Result in Lower Sale Proceeds?

[Music] for business owners thinking of selling their company the price they will receive is one of the first things they think about when one of these business owners starts to explore the idea of transferring ownership to their employees by creating an employee stock ownership plan or esop for short often they are told to shy away from this option because the price they can receive from an esop is limited in this video we will explore whether this advice is accurate there are a few things we think you will take note of while watching this video the foundation for the price paid for your business always starts with the fair market value but is adjusted by the type of buyer who ends up purchasing your business a strategic buyer has the most flexibility to pay more than fair market value but finding this type of buyer may be difficult and esop is a readily available buyer however it is the most regulated of all buyers with little flexibility to deviate from fair market value if receiving the highest price possible and exiting the business completely upon the sale are your two top priorities and you have access to a strategic buyer then selling to an esup may not be the best choice for you but at the same time there are many other goals and objectives that business owners should consider when selling their company we think you will see that the sale to an esop can fulfill many of these objectives so let's dive into the details in order to understand what value you might receive for the sale of your business we need to introduce two types of buyers the strategic buyer and the financial buyer as reflected in the name a strategic buyer purchases your business for strategic reasons they are looking to grow their business by acquiring a company similar to theirs which will help streamline their operations or allow them to sell new products because of the synergies the purchase provides them they are almost always willing to pay more for your company however they are also more likely to terminate many of your employees and save costs in the process on the other hand a financial buyer is interested in the return on their investment the acquisition will provide that is the cash flow your business currently has as well as the future growth potential they generally pay close to fair market value and they are much more likely to keep your employees however part of the return on investment they look for is the price they can receive in turning around and selling your company in a quick time frame now that we've covered the difference between a strategic buyer and a financial buyer let's look at an esop as a buyer of your business an esop is a special type of retirement plan that is created on behalf of your employees and used as the vehicle to buy your business shares of stock that were purchased from you by the esop are contributed to the retirement accounts of all eligible employees each year when an employee terminates employment or retires they are paid out the value of the shares of stock that have accumulated over the years in their retirement account when an owner chooses to sell their business to an esop the employees are represented by an individual or company known as the esop trustee who acts in the best interest of the employees unlike dealing with a strategic or financial buyer when it comes to the price an esop can pay there is very little flexibility in determining the value by law the esop trustee cannot pay more than the fair market value as defined by the irs there are many processes and procedures that need to be followed to ensure the price and terms of the sale to an esop adhere to the irs's guidelines around fair market value so having a team of qualified advisors is very important if the price you can sell to an esop is regulated with little flexibility why would you choose to sell to an esop there are a couple of unique attributes the sale to an esop brings to the table first if certain requirements are met selling to an esop can provide significant tax advantages to both the seller and the resulting esop owned company these include the deferral of taxes paid by the seller which results in a much higher net proceeds amount and for companies designated as an s corporation the portion of the company owned by the esop is not subject to federal income tax this is an incredible competitive advantage you can give to your employees as they become owners of your company next selling to an esop gives you immediate access to a willing buyer without the significant time and money required to market your business for sale an esop is also very flexible as it does not have to buy 100 percent of the business all at once this means a business owner can sell stock over a period of time and still remain involved in the business lastly esops allow a business owner to leave their legacy many owners have made it a priority during their career to balance their own personal profitability with the well-being of their employees and their community the esop allows this to continue by transferring ownership to those employees and keeping the business in that same community [Music] so now that you've learned a little bit about each type of buyer have you started to think about what your objectives and priorities in selling might be and how these align with specific buyers here are a couple of ideas for you to consider do you want to receive the highest price possible or is fair market value enough are you concerned about leaving your legacy and protecting and rewarding your employees are you looking to save taxes what is your timing do you want to retire now or sell and stay involved in the business do you want to sell all of your company at once or do you want to sell a portion now and more at a later date lastly are you interested in receiving a portion of the sale price based on future company performance these are just a few of the things that business owners think about when contemplating the sale of their business in summary who you ultimately sell your business to should be determined by all of your objectives and priorities if you are fortunate to have access to a strategic buyer you have the potential to receive the highest price possible for your business whereas a financial buyer and an esop both pay fair market value with the esop being closely tied to the irs's definition of this when it comes to being able to leave your legacy and protect and reward your employees and esop is the clear buyer for you in all three scenarios it is possible for you to receive a portion of the sale price based on the future performance of your company if having the ability to control taxes for you and your company after the sale is important the esop is the only option that allows this all three types of buyers will allow you to sell one hundred percent of your business retiring completely but selling to an esop is likely to be the only option that allows you to sell a portion of your business and remain involved for many years after we hope this video has given you a deeper perspective on the question of whether selling to an esop is limiting your sale price and has also helped you begin to think about what your objectives and priorities are in selling your business [Music] for more detailed information and resources related to esops and other forms of employee ownership or to find a state center for employee ownership near you please visit our website eoxnetwork.org you