How can the Succession Planning Program help me, a small business owner?

The Succession Planning Program can assist you in many ways. We offer seminars and webinars on succession planning topics throughout the year and throughout the state; we have published a how-to manual, An Owner’s Guide to Business Succession Planning, available for purchase or free download; we have also put together an hour-long dvd overview of the succession planning process and it is available for purchase and viewing on the web; we have a distance learning initiative that tries to bring all of the online resources that are available together in one place; and, on a limited basis, we are available to make presentations to business and non-profit groups, as well as individual consultations with business owners.

What is a webinar?

A webinar is an online seminar, in which, from the comfort of your home or office using a web accessible PC and a telephone, you can take part in a live and interactive presentation on a particular topic. A listing of both upcoming live webinars, as well as archived webinars, can be found here.

What is succession planning?

Succession planning often gets confused with Estate Planning. While similar, they are also different. Estate Planning is the process of the transfer of wealth and assets, which a business may be a part. Succession Planning on the other hand is the process of transferring both ownership and control of a business, with the goal of keeping the business open and operating in one way or another.

What is the Succession Planning Program?

The Succession Planning Program is a service of the Ohio Employee Ownership Center, a non-profit based at Kent State University. The goal of the Succession Planning Program is to help small business owners in transferring the ownership of a business to a next generation.

Am I personally liable for the company’s debts?

No, your personal property is not at risk. Like regular stockholders, ESOP participants are not personally liable for the debts of the corporation.

Can a Family Limited Trust take advantage of the 1042 capital gains tax deferral?


Can I sell my stock?

Yes, though usually you sell it back to the company according to the ESOP agreement. ESOPs are pension plans so you do not usually receive the bulk of your stock until retirement. Federal law requires closely held ESOP companies to repurchase distributed stock from participants who have left the company.

How Do I Get the Value of My Stock at Retirement?

Typically, employees receive the stock allocated to their individual account (distribution) at retirement. A distribution can be in stock or cash, depending on the plan rules. If the stock is not readily tradable (not traded on a public stock exchange), the participant has the right to exercise a put option, which is a right to sell back the shares to the company. In turn, the company has an obligation to purchase your shares. The company is required to repurchase the shares distributed to you at the price determined by the valuation of the ESOP stock for that year. Valuation is a determination of the “fair market value” of the stock. Federal guidelines specify that valuations should be conducted at least annually, and that they should be done by a qualified, independent appraiser.

Once the put option is exercised and the stock value is determined, the retired (deceased, disabled or terminated) employee is assured of payment of his or her account balance. However, the company may choose to pay in one lump sum, or in installments with interest over a maximum of five years.

Fair market value is the amount at which an asset would change hands between a willing seller and a willing buyer when neither is acting under compulsion and when both have reasonable knowledge of the relevant facts.

How Does the ESOP Purchase a Company?

A simple transaction involves only four parts. The bank makes a loan to the company. Usually this loan is made with an agreement that the company will make a “mirror loan” to the ESOP.

The company makes a mirror loan to the ESOP. Since the ESOP has no assets, the bank makes the loan to the company, secured by the assets of the company.

The company pays the original owners and is given either assets or stock in return.

The stock is then put into the ESOP.

A complex transaction involves one or more additional investors. In such a transaction: The outside investors give the company their equity investment in return for stock and the bank makes a loan to the company.

The company makes the “mirror loan” to the ESOP.

The company pays the original owners and is given company assets in return. Or original owners’ stock may be given directly to the outside shareholders and the ESOP.

Note: Both of these transactions are cases in which the money that purchases stock for the ESOP is borrowed or “leveraged.” In leveraged buyouts, the stock which is given to the ESOP is placed in the suspense account. This stock is released to the individual accounts as the ESOP loan is repaid.

What are the Advantages of ESOPs?

The ESOP is a flexible way to hold company stock. An ESOP can own as little as a fraction of 1 percent of the company stock, or as much as 100 percent of the company stock. The ESOP is one form of corporate ownership which can be combined with other forms of stock ownership among employees and outside shareholders. ESOPs can help to improve company performance. Studies have shown that companies that combine employee ownership and employee involvement are likely to outperform comparable conventional companies in productivity, job creation and overall corporate performance.

On top of improving their performance, ESOP companies enjoy significant tax advantages. The tax incentives make ESOPs an excellent mechanism for low cost financing, as well as another form of tax deferred income for employees.

What are some of the Common Advantages of ESOPs?

Company:Company contributions and dividend payments held within the ESOP are tax-exempt, with certain restrictions. A leveraged ESOP, one in which a loan is used to finance the purchase of stock by the ESOP, offers added tax benefits. Both principal and interest payments are pre-tax expenses.

Seller:The seller has a tax incentive called the 1042 rollover or the capital gains rollover. This amounts to a deferral of capital gains tax payments on sale of stock to an ESOP. To take advantage of this tax incentive, the ESOP must own at least 30% of the firm.

Employees:Company contributions to the ESOP are tax-sheltered for employees; so is the increase in value of employee accounts.Employees do not pay taxes on the stock in their accounts until they cash out at retirement or after leaving the company.

How Does the ESOP Repay the Loan?

Each year the company pays back part of the principal on its ESOP loan. The loan payments are made through the ESOP to the bank. The payments, therefore, are considered deferred income, like contributions to a pension plan (which is exactly what they are). This payment releases the stock in the suspense account to the individual accounts. The stock is released in amounts proportionate to the amount of the loan which is repaid. If the company pays 1/10 of the loan then 1/10 of the stock in the suspense account is released or allocated into the individual accounts. The number of shares allocated to individual accounts depends on the amount of the company’s contribution and the allocation formula established by the ESOP. Under DOL guidelines, allocations must be based on a fair formula. For example, hours worked, W-2 earnings, equally, a combination of these, or some other formula that meets federal guidelines. Once the stock is allocated to individual accounts, it is subject to a vesting schedule, like other pension plans. Vesting in an ESOP works just as it does in a regular pension plan. Although stock may be allocated to your account, you do not have a full claim on it until you are 100% vested. Federal law requires that employees be completely vested after seven years of being in the plan, although many ESOPs vest more quickly.