Entrepreneurs who work hard and build a business over decades realize that, at some point, they need to think about slowing down and stepping back. Frequently, planning and specific decisions about transition are put off. Entrepreneurs worry about two things that can make delay an attractive option. Number one is a concern about their standard of living if they sell their business. Number two is facing the prospect of disposing of the entrepreneur’s legacy business that may represent a lifetime of work and achievement.
Both of these concerns are very real. First, after payment of transaction costs and taxes, the possible investment of the net proceeds of the sale of the business very well may result in a reduced cash flow to the entrepreneur and family. And, unless there’s a family member who is capable – and interested – in taking over the business, the entrepreneur justifiably feels that the legacy business may have to be surrendered. Both of these factors make it hard to let go - or even to think about letting go.
Here’s something for the reluctant entrepreneur to consider: there is a way to defer or even avoid taxes on the sale of your business, to undertake a transaction without the aggravation and delay of dealing with pesky buyers, to sell your business in installments or a lump sum - and still not give up control!
These results can be attained if the business is sold to its current employees through an employee stock ownership plan, or ESOP.
Maybe the entrepreneur you know would be more willing to plan for a business transition if he or she were aware of these ESOP possibilities.
The Takeaway: ESOPs can be more than just retirement plans and for many entrepreneurs, they offer the best succession solution.