What and how much? The biggest question on the minds of most owners and shareholders is:
There is also no better way to preserve the legacy of your business and keep your options open for your role in the company going forward. One of the most difficult problems for owners of closely held businesses is finding a way to turn their equity in a business into cash for retirement or other purposes.
The decision to sell is more than an economic one, however. After putting years into a business, an owner develops a strong feeling of identity with the company. At the same time, the owner often has a sense of loyalty to the employees and would like to see them have a continuing role in the company.
For some business owners, the answer to these problems will be to turn over the company to an heir or sell to a competitor.
But many owners do not have heirs interested in the business, and outside buyers are not easy to find. Even if they can be found, they may want to buy company governance in a business plan company for its customer lists, technology, or facilities, or may just want to put a competitor out of business.
ESOPs employee stock ownership plans can be a very attractive and tax-favored alternative. For the owner of a C corporation, proceeds on the gain from the sale to the ESOP can be tax-deferred by reinvesting in the securities of other domestic companies.
If the company is an S corporation, LLC, or partnership, it can convert to a C corporation before the sale to take advantage of this tax deferral. If the company stays S, the owner does pay capital gains tax on the sale, but reaps all the other benefits of selling to an ESOP.
In other words, starting inbusinesses will subtract depreciation and amortization from their earnings before calculating their maximum deductible interest payments. The sale can be all at once or gradual, for as little or as much of the stock as desired. The owner can stay with the business in whatever capacity is desired.
The plan is governed by a trustee who votes the shares, but the board appoints the trustee, so changes in corporate control are usually nominal unless the plan is set up by the company to give employees more input at this level. An ESOP is a kind of employee benefit plan, similar in many ways to qualified retirement plans and governed by the same law the Employee Retirement Income Security Act.
ESOPs are funded by the employer, not the employees. Stock is held in a trust for employees meeting minimum service requirements and allocated to employees based on relative pay or a more level formula, then distributed after the employee terminates.
ESOPs cannot be used to share ownership just with select employees, nor can allocations be made on a discretionary basis. Alternatively, the owner can have the ESOP borrow the funds needed to buy the shares.
Normally, the bank will loan to the company, which then reloans to the ESOP, not necessarily on the same terms.
In some cases, such as when the total debt would exceed current book value, the bank may also want a personal guarantee, or may be willing to loan only part of the total sought.
In that case, the ESOP would buy part of the shares now, and part after some of the debt has been paid. Perhaps half of all ESOPs, however, are funded instead by a seller note. The ESOP acquires the shares then pays back the seller at a reasonable rate of interest not more than what a commercial lender would charge for loans of similar risk.
Sellers often like this idea because not only do they get their shares sold, but they get a reasonably good rate of return on the note. In this scenario, however, the rollover would apply only to what is reinvested in the first year.
The entire amount of the sale could only be reinvested, therefore, if the seller has other funds available or, as normally happens, the seller borrows money from a bank to buy special ESOP bonds that qualify for this kind of sale an increasingly common approach.The business plan (or strategic plan) is the document that methodically illustrates the company’s strategic direction, its main operating and financial targets, the actions it will take to achieve those objectives, the new initiatives and investments planned, and their impact on the company’s performance.
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