Selling to an ESOP is smart – if done correctly

When it comes time to develop a business succession plan, there are many ways to move forward. One is selling to a Private Equity Group, but higher interest rates have put a damper on sales.

Another option that has seen a big uptick recently is selling to an Employee Stock Ownership Plan (ESOP). It gives employees ownership interest in the company in the form of shares of stock and can be a good way for business owners to align the interests of employees with those of the shareholders.

When a business is sold to employees, a loan is often needed to finance part of the transaction. An experienced banker can guide the company to the best solution for its situation and help navigate the unique accounting, transaction structure, and regulations that come with an ESOP sale.

Big advantages

Selling to an ESOP is one of the most flexible succession strategies available and one that can provide many tax advantages. Plus, you decide how much of the business to sell and when. An ESOP sale can help boost recruitment and employee retention, both key variables that help maximize a company’s value.

When structured correctly, an ESOP sale can be a good way for business owners to participate in management over their company after they exit. It can even be set up so that the seller receives benefits from future increases in the company’s value.

The best time to sell

When a company is sold to an ESOP can have a major impact on how much the sale is worth. There are several things to consider – and get right – before making a move.

For instance, a strong and stable management team is a must.

The right team

There are many variables when it comes to setting up an ESOP and each can have a major effect on the success of the sale. That’s why it’s important to work with a team that has extensive experience in the area. Business owners should line up a lawyer who understands the intricacies of ESOP documents, an accountant who knows the unique accounting set up needed and where the pitfalls lay, bankers who are familiar with ESOP financing and know the best way to structure loans and consultants or an investment bank to manage the process.

First Financial Bank has several decades of experience when it comes to ESOP sales. It’s what our team does. Unlike many banks that only offer ESOP lending when the market is attractive, it’s one of our focuses.

With the right professional advisors and a seasoned banking team to help craft a financial plan tailored to the seller’s needs, a smooth transaction that sets the company up for long term success can be accomplished.