Both families came up with a solution: an employee stock ownership plan, or ESOP. For Kloke, who devised the plan with his accountant, an ESOP would turn his company’s 80 qualified employees into owners, solving his succession problem It would also allow the Klokes to step back from the company, liquidate their holdings and set off on the travels they had long craved.
TOP VIEW
For business owners seeking an exit strategy, an employee stock ownership plan, or ESOP, has several advantages. ESOPs enable the owner to sell all or part of a company to its employees, garnering liquidity—and tax breaks—for the owner and a new source of motivation for the staff. ESOPs work best in larger companies that can generate enough cash to finance the buyouts. |
Land of ESOPportunity
Today there are some 11,500 companies with ESOPs in the United States, including giants such as Procter & Gamble. While these tools are effective defenses against hostile takeovers, this is the motivation for ESOPs in only a handful of cases. The vast majority are set up as exit strategies for owners of privately held businesses.
These transactions involve a company’s owners selling their stakes to the ESOP plan. The plan then parcels out shares to qualified employees in much the same way as profit-sharing plans do; employees do not have to buy the stock. An ESOP offers a number of advantages for an owner, particularly when compared to other liquidation strategies, such as selling to a strategic or financial buyer. But perhaps the most compelling aspect of an ESOP is its tax benefits. ESOP legislation provides tax incentives for owners, shareholders, the lending institution that provides financing for the ESOP, the employees and the company itself.
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