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Ten ESOP Fables – Debunked – Part III

This is the third in a series of articles that will attempt to dispel ten common misconceptions, or fables, about ESOPs.

ESOP Fable #4: My employees cannot afford to buy my company.

Another common misconception can be paraphrased as, “How can my employees even consider buying my company…most live paycheck to paycheck.”  The answer is simple: The employees do not have to pay for the company.  The employees do not contribute personal funds, or even provide credit for the transaction.  Funding is provided by specialty lending institutions whose focus is solely on funding ESOP buyouts.

Over time, ownership is passed from the ESOP to the employees in the form of a contribution, in exchange for their dedication and loyalty to the company. The longer the employee remains with the company, the larger will be his or her ownership stake. The ESOP is, in essence, a retirement plan, funded by stock in the company.

The motivational aspects of these plans can be extremely powerful for the employees. In fact, most ESOP companies experience lower employee turnover after implementing the plans; and according to several national studies, ESOP companies tend to be 8-12% more profitable than their non-ESOP counterparts.

ESOP Fable #5: An ESOP won’t pay me what my company is worth.

Most business owners have ideas of what their companies are worth. And many feel by selling to the employees through an ESOP, they will not realize full value for their shares. The truth is if you sell your company to an ESOP, you will be paid full fair market value. The determination of just what is fair market value will be made by an independent, certified, business valuation analyst. This removes the need to endlessly negotiate the sale price of the shares being sold.

The business valuation profession uses sophisticated yet standardized techniques to determine the fair market value of a business interest. Independence of the valuation analyst is required, which effectively removes any biases in favor of either the buyer or the seller. Therefore, you can be confident you will receive a fair price for your company when selling to an Employee Stock Ownership Plan.

Moreover, by selling your company to an ESOP, you will have the opportunity to fully defer all taxes on the sales proceeds. This means not only will you receive full value for your company, but you will also enjoy powerful tax advantages as a result of selling to an ESOP, which otherwise would not have been available through selling to a third party.

Next month’s article will tackle: ESOP Fable #6: ESOPs are new and untested.

As ever, if you know of a business owner who’s thinking of selling or buying a business and who might benefit from a free, confidential, consultation with us, have them contact me directly.

By: Mike Ertel, Transworld M&A Advisors