The Desire for Liquidity
The majority of business owners’ personal wealth is usually tied up
in the company. As an owner looks to diversify, a liquidity event
becomes a critical step in the wealth management planning process.
Most owners employ several traditional exit strategies for succession, including:
• Transfer to the next generation
• Sale to management
• Sale to a financial buyer (e.g., a private equity firm)
• Sale to a strategic buyer (e.g., a publicly traded company)
However, another exit strategy is gaining traction: the sale of
all or a portion of the business to an employee stock ownership
plan (ESOP). According to statistics from The ESOP Association,
there are approximately 10,000 ESOPs in the U.S. covering 10. 3 million
employees (10% of the private-sector workforce). While ESOPs are prevalent
in a broad range of industries, the majority of ESOP Association members are in
manufacturing (22%), construction (13%), and engineering (9%).
Why Are ESOPs So Popular?
ESOPs are a successful exit strategy for many company owners. In addition to providing retirement proceeds
to participants that often exceed those of traditional retirement plans such as 401(k)s, ESOPs create a liquidity
event for business owners and can be a powerful tool in succession planning.
Provided certain rules are met, another ESOP feature that may appeal to owners is the deferral of capital gain if the owner
invests the proceeds of the sale in qualified replacement property – generally U.S. corporation stocks and bonds (not mutual
funds, REITs, or government securities). Depending on the owners’ subsequent estate, charitable contributions, and personal
financial planning, all (or a portion of) the capital gain may be permanently deferred.
Numerous studies by The ESOP Association and National Center for Employee Ownership (NCEO) demonstrate that ESOP-owned entities outperform their peers and the general stock market, increase productivity and sales, and have a much smaller
bankruptcy rate than other businesses. ESOP
For most construction companies, the recent recession WAS ESPECIALLY PAINFUL. NOW THAT
WE ARE IN AN ALBEIT A MODEST ONE, many business owners believe
that they’re back to break-even or on solid footing. After putting succession planning on hold
during the downturn, you may be tasked with exploring several exit-strategy options for your
company’s owners as they seek to monetize their hard-earned wealth.