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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 the next generation, with a specialty on selling to the employees.

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.

How Can the Succession Planning Program Help Me, a Small Business Owner?

The Small Business Succession Planning Program at Kent State University can assist you in a a couple of ways. The first step is to contact us to have discussion around your broader succession planning goals and objectives (personal, financial, and for the business); we will then help you review your broader options undefined and then discuss whether a sale to the employees is worth further exploration. We also have including webinars on various topics and publications that you can review on your own time. The initial consultation, either by phone or in person, is usually at no charge. Depending on choices made, further work may be on a fee for service basis.

Why Should I Consider Selling to My Employees?

Selling to your employees via an Employee Stock Ownership Plan (ESOP) or Employee-Owned Cooperative can satisfy a number of needs for a seller. For many business owners, leaving a legacy to the employees and the community is an important factor. A sale to employees can create a buyer for a profitable company that may find the "open" market less viable or even personally appealing. And in certain cases, a sale to the employees may allow the owner who is not ready to retire the chance to transition out over time, or to gain some liquidity in their assets.

What Is An ESOP?

An ESOP is a qualified employee retirement plan. It differs from other qualified retirement plans in two ways: (1) It invests primarily in the stock of the employing company, and (2) it can borrow money. Since it is a qualified plan, company contributions to the ESOP are tax deductible, even when they go to repay the principal borrowed to buy stock in the company. Because the ESOP can borrow money, it can be a ready market for closely held stock, including minority interests. A controlling owner can sell a minority portion of his or her holdings now, obtaining liquidity but retaining control until selling the controlling interest at some point in the future. As with other forms of leveraged buyouts, it will probably be necessary to provide collateral on the ESOP loan in the form of company assets.

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 the Tax Advantages of ESOPs

  • For the 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.
  • For the Company 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.
  • For the 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.

What Is An Employee Owned Cooperative?

An employee cooperative is a corporation owned and controlled by its employees that jointly markets the products or services produced by its member-employees in the same way as a farmers’ cooperative markets its members’ production of grain or milk. In most employee cooperatives, each member-employee has one vote in the affairs of the cooperative. Its profits are allocated among the members on the basis of the value of the labor (“patronage”) each contributes to the co-op. In co-ops, financial ownership is generally separated from voting control and distribution of profits. In some ways they resemble the operations of a Partnership or LLP, but in others they are different.

What Are the Advantages of an Employee-Owned Cooperative?

Employee-Owned Cooperatives have fewer moving parts, and a lower regulatory burden (and a lower corresponding cost to set up and maintain) than ESOPs. They are usually cheaper to set up than an ESOP and can therefore be a viable option for smaller companies. This lower regulatory burden also allows for more flexibility.

Common Tax Advantages for Employee-Owned Cooperatives?

  • For the Company Seller: As is the case with an ESOP 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,  employee-members must own at least 30% of the firm.

What's My Next Step?

  • Give us a call at 330-672-3028 or send us an email to set up an initial consultation.
  • View videos about selling your company to your employees using an ESOP at this link
  • Purchase one of our publications, An Owners Guide to Business Succession Planning or Selling Your Business to Your Employees at this link.
  • You can purchase access to our online training course in Selling to Your Employees at this link.

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