“The goal was to make ESOPs the most tax-favored way to transfer ownership to employees,” says Corey Rosen, executive director of the National Center for Employee Ownership (NCEO) in Oakland, Calif. “So whatever you’re comparing it to, the tax treatment won’t be as good.” Indeed, if the company buys more than 30 percent of the shares and the owner rolls his proceeds into securities of U.S.-based operating companies, he can defer taxes on the gain indefinitely.
Keeping it in the Family
In addition to tax benefits, an ESOP holds more certainty for owners attempting to liquidate their holdings than does selling the business on the open market. Such a sale can be gut-wrenching for the owner. Peter A. Rohr, senior vice president of Merrill Lynch’s Private Banking and Investment Group in Philadelphia, has witnessed much gnashing of teeth. “They felt some sort of loss by thinking of selling the company,” he says. “They even feel a bit traitorous when employees begin to ask, ‘Who are these people in suits coming in to see the owners?’ ”
Selling to an outsider can also be detrimental to the business itself, according to Firmat, who established an ESOP in 1999. “People don’t take into account the costs of putting a business up for sale and what impact that has on productivity and market presence and just a whole slew of issues,” she explains. “What the ESOP provides for smaller companies that are not public is an avenue of liquidity for the ownership to say, ‘I see how I can sell my shares in a way that is not going to hurt people I work with or the company I’ve built.’ ”
Selling to another party is typically an all-or-nothing proposition, but ESOPs enable an owner to sell a part. Full Sail established an ESOP after four of the company’s six original founders decided that they did not want their money bottled up in the microbrewery. Firmat and
her husband, Jamie Emmerson, did not want to sell. The other investors gained liquidity via the ESOP, while Firmat and Emmerson maintained their 42 percent stake. Not only have Firmat and Emmerson remained active in Full Sail, they have laid the groundwork for someday selling the company in its entirety.
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