The personal and financial impact of selling your business
At The ESOP Group, we understand the emotions that come with owning and growing a successful company—and the concerns that often arise when transitioning your ownership role. In fact, since 1989, we’ve helped hundreds of clients throughout the country clarify their business succession goals. They have trusted our expertise to help them create the best outcomes for their families, their employees and those next in line.
Advice for your broader wealth management plan
While many of our clients initially come to us for our ESOP insight and execution, we view that transaction as part of the larger scope of your wealth management strategy. Our experienced team is well-versed in addressing the complex wealth advisory and planning challenges affluent investors face. To us, there’s no greater priority than providing the advice you need to make well-informed decisions to preserve and protect what matters most.
“We’ve learned over the last 25 years that, to our clients, business is personal. And the decision to sell is never easy. More often, it’s life changing—for owners, their families and the future they’re shaping.
That’s why we believe so strongly in what we do and how we can help you successfully take that next step—in business, but also in life..”
— Keith A. Mericka
The ESOP basics
Employee Stock Ownership Plans (ESOPs) can provide tax-efficient estate planning opportunities for closely held business owners by creating liquidity for their shares and business succession options for their families and employees. An ESOP is a qualified retirement plan designed to invest primarily in stock of the employer. ESOPs provide tax advantages to the employees and employer. The Internal Revenue Code provides tax incentives for business owners to sell their company stock to the ESOP and provides benefits to employees by allowing them to participate in the growth and success of the business while having the option to receive company stock through a tax-deferred vehicle.
Employee Stock Ownership Plans (ESOPs), created by ERISA in 1974, are tax-efficient exit strategies that enable business owners to monetize the wealth in their privately held business and defer, or with proper planning, potentially eliminate the long-term capital gains tax triggered from the sale.
Provided certain requirements are met, the ESOP can also borrow money to purchase new or existing shares (referred to as a “leveraged ESOP”). Shares in the ESOP trust are allocated to separate accounts for the employee participants. ESOPs must give participants the right to have the employer repurchase employer stock in exchange for cash (unless there is a public market for the stock).
There are many tax benefits to the company, the owners and its shareholders.
A C-Corp can deduct contributions to the plan, including principle and interest related to the ESOP loan, dividends paid on stock held by the ESOP and, most importantly, selling shareholders can elect to defer capital gains taxation if eligible for section 1042 provided certain conditions are met, including:
- The ESOP owns 30% of the company after the sale
- The proceeds are invested in Qualified Replacement Property (QRP)
QRP includes stock, bonds and other debt issued by most, but not all domestic (U.S.) operating companies. The disposition of the QRP will trigger the deferred tax on the gain. As a result, the investment strategy for the sales proceeds can be critically important.
For S-Corps, earnings on stock held by the ESOP are tax-free. As an example, a 100% S-Corp owned ESOP pays no federal or state income tax. Why? Because the sole shareholder is a tax-exempt ERISA retirement plan.
Internal Revenue Code of 1986, as amended (Code), section 1042, allows an owner of a closely held C corporation to defer, or potentially eliminate, capital gains taxation on “qualified securities” he or she sells to an ESOP if the taxpayer reinvests the sale proceeds into “qualified replacement property” (QRP). QRP includes certain stocks, bonds and/or other securities of operating companies incorporated in the United States and meeting other tests. If the QRP is held until the death of the taxpayer, the QRP transfers to the taxpayer’s heirs with a stepped-up cost basis and thus, the gain on the stock sale to the ESOP has favorable tax treatment for federal capital gains taxation purposes and for many state capital gains taxation purposes.
Guiding you through business succession
Employee Stock Ownership Plan (ESOP) resources
Delivering wealth planning for today and tomorrow
Comprehensive post-exit wealth management is as critical to our clients’ success as the ESOP transaction itself. We view the successful execution of your ESOP strategy as a starting point for important planning conversations—from estate and legacy planning to portfolio management and charitable giving. As Private Wealth Advisors, we have the expertise and resources to assess the potential impact of your sale. Our goal is to help you make wellinformed decisions for the long term that help protect and preserve all you’ve achieved.
Keith Mericka and Leslie Lauer have been recognized as industry leaders.
- Keith Mericka, Barron's Top 1,200 Financial Advisors, 2014, 2015, 2016, 2017
- Keith Mericka, Financial Times Top 400 Financial Advisers, 2013, 2014, 2015, 2016
- Keith Mericka, Barron's Top 1,000 Financial Advisors, 2009, 2010, 2011, 2012, 2013
- Keith Mericka, WealthManagement.com Top 100 Wirehouse Advisors, 2011, 2013, 2014, 2015
- Leslie Lauer, Financial Times Top 400 Financial Advisers, 2017
- Leslie Lauer, Forbes Top 200 Women Advisors, 2017
- Leslie Lauer, Barron's Top Women Financial Advisors, 2016
- Leslie Lauer, WealthManagement.com Top 50 Wirehouse Women, 2015