Will Stewart

E: wstewart@pcecompanies.com

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Implementing an Employee Stock Ownership Plan (ESOP) as part of a diversification or exit strategy for business owners fell out of favor in recent years as the credit crisis reduced liquidity options. All evidence, including recent transaction activity, indicates liquidity has returned to the ESOP market. This development, coupled with several research studies completed by various academic and non-profit research institutes, makes the sale to an ESOP a compelling strategy for today’s business owners who want to participate in the future growth of their business while diversifying personal assets.

In a Rutgers University Study on the effects of ESOP ownership, Douglas Kruse and Joseph Blasi of Rutgers determined that ESOP ownership appears to increase sales, employment and sales per employee by as much as 2.4% per year as compared to companies without ESOP ownership. Many ESOP owned companies point to several reasons for this including:

  • Increased employee retention
  • Reduction or elimination of corporate federal income tax liability
  • Greater sense of personal responsibility for employees (“thinking like owners”)

For business owners considering selling stock to an ESOP, this means the portion of the company they retain will be worth more in the future than it would have been without an ESOP.TV-opt

If a company is currently valued at $20 million, a business owner could diversify their personal wealth by selling 30% to an ESOP for $6 million. If that business owner expects a 10% annual value increase then the business would be worth approximately $29 million in 2015. However, if we apply the anticipated sales growth increase as determined by the Rutgers study, that same company could be worth approximately $32 million in 2015 if it were partially owned by an ESOP. That means the business owner could execute the sale today, diversify their assets and still end up financially as if they held 100% of the stock over that same period.  Total-proceeds

Additionally, the selling shareholder has an opportunity to defer all of their capital gains taxes in the sale to an ESOP. If the shareholder is able to take advantage of this tax benefit, the net proceeds from the partial ESOP sales strategy would exceed that of the hold strategy, while diversifying shareholder risk.

By initiating a partial sale to an ESOP today, owners who plan to exit after growing their business over the next five years will be rewarded with personal diversification, enhanced corporate growth and greater net proceeds.


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Will Stewart


Will Stewart

Investment Banking | ESOP

Orlando Office

407-621-2124 (direct)


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