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Business Succession via ESOP's

All owners will one day face the dilemma of how to transition their business once they have made the choice to leave.  There are many ways to conduct a business transition, but I would strongly encourage you to evaluate the merits of creating an ESOP (Employee Stock Ownership Plan).

I just attended the National ESOP Association's Annual Conference in Washington D.C.  Once again, I came away from the conference with an even stronger belief that ESOP's are a wonderful tool for business succession. I heard former owners and the new employee owners speak of their successes and challenges.  The difference is that they are now on common ground instead of owner vs. employee.  The common ground that ESOP's provide has led companies to stronger financial success.

A study by Professor Hamid Mehran of the J.L. Kellogg Graduate School of Management, Northwestern University, showed that when evaluating comparable companies, those with ESOP's showed on average 2.7% higher profits.  ESOP's also allow more people to experience business ownership and the risk and rewards of being an owner - something that most former employees would never achieve.

The original owner most likely could sell their company at a higher value to an outside entity, but then the employees are at the mercy of the new owners.  An ESOP provides many different benefits to all involved.

  • Potentially pay no tax on the original sale of the company
  • Potentially pay no tax on the profits of the ESOP company
  • Allows the employees who helped build the company an opportunity to share in the future success of the company
  • Reduces the chances that the company will move

Do not think that an ESOP gives everyone an equal voice in the company.  The company still maintains a management structure, a board of directors, trustees, and keeps many of the same decision making processes that were in place before the ESOP.

Creating an ESOP is a process that you should research and make sure that you have good advisor's at all levels.  The following are links to web sites that contain a wide variety of free ESOP information:

National ESOP Association

National Center for Employee Ownership

Ohio Employee Ownership Center

The Beyster Institute

Please take the time to consider and research the ESOP path for business succession.  It is well worth the effort.

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