Filed Under:Markets, Employee Benefits

Exploring the ABCs of an ESOP Transaction

Photo credit: Stuart Miles
Photo credit: Stuart Miles

As baby boomer business owners move toward retirement, Employee Stock Ownership Plans are getting more and more attention.  An ESOP provides a flexible way for owners to exit their businesses, as well as to diversify their portfolios in advance of retirement.

An ESOP often creates numerous opportunities for financial professionals as well, including helping clients with planning, investing and protecting assets. Unfortunately, many business owners have a limited understanding of these plans and their benefits. Gaining a basic understanding of the plans may help guide an initial client conversation.

This has the practical effect of making the loan principal repayment tax-deductible, whereas typically only interest payments are deductible in a third-party sale arrangement.  For this $6 million transaction example, assuming a 40% combined federal and state income tax rate, $2.4 million in tax savings are generated.  In essence, over the course of the loan repayment, tax savings in excess of the interest deduction fund 40% of the purchase price.  

In addition to this tax benefit, there are a number of other potential benefits depending on how the business is structured, including:

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Nichole Morford

Nichole Morford
Managing Editor

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