After spending a lifetime building your company, it can be difficult to consider retirement. It is not easy to hand off your company to a new generation out of concern that the new owners do not have the same dedication to the company you built from scratch. For many business owners, an ESOP provides the ideal vehicle for transitioning to retirement while maintaining your legacy.
An Employee Stock Ownership Plan (ESOP) is a qualified retirement plan that invests in company securities. Shareholders sell shares of stock to the ESOP trust, giving participating employees an interest in the company. The company contributions to the ESOP are generally tax deductible, and the employees can defer tax until they receive distributions.
Over the next few years, many baby boomer-owners of companies will be looking to transition into semi or full-retirement, as part of the so-called “silver tsunami.” These business owners have to consider a variety of options for the future of their company. Possibilities include turning the business over to a son or daughter to keep the business in the family, selling to the highest bidder, or simply closing up shop.
However, one option that can help maintain the local economy, reward employees, and allow for a smooth transition to retirement is employee ownership. For business owners on the verge of retirement, an ESOP allows for a gradual transition from ownership and management of the company. The owners and shareholders can sell shares to the ESOP over time, allowing the owners to maintain a transition of ownership on their own timeline. In addition, the purchase price paid by the ESOP is derived from tax-deductible Employer contributions and the seller may elect to defer their tax due on the sale.
In contrast, after deciding to sell the company to a third party, the founder has no control over the future of the company. A new third-party owner may not have the same commitment to dedicated employees, the local economy, or the founder's ethos. The transition to an ESOP provides peace of mind not only for the owner but also for a number of customers and vendors who are always cautious about major changes in the companies they work with.
Here in San Diego, a number of companies have already taken advantage of the unique benefits that ESOPs offer, including defense contractors, biotech, engineering and architecture firms, and even the craft brewing industry. Employee ownership provides not only financial and tax benefits to owners and employees, but it also increases productivity and reduces turnover. Many more companies have begun to explore the feasibility of an ESOP as part of their succession planning.
An ESOP also provides a way to keep the company local, provide good jobs to residents, and act as a beneficial member of the community. This can also maintain the company's hard-earned goodwill, as something many business owners take pride in, especially with their name attached to the company.
If you have any questions about how an ESOP can help your business while providing for your retirement, the law firm of Butterfield Schechter LLP is here to help. We are San Diego County's largest law firm focusing its law practice on employee benefits law and in particular ESOP matters. Contact our office today with any questions on how we can help you and your business succeed.