ESOP as an Exit Strategy

ESOP as an exit strategyAn ESOP is Not a Succession Plan

An ESOP is only a mechanism for the sale of a business, and it is not a succession plan. That is one reason why ESOPs are not always the best solution for an exit strategy.

True North Business Navigation Professionals help develop a clear, well-thought-out succession plan that greatly enhances the probability of success for an ESOP.

  • A special provision known as a 1042 election can enable the selling business owner to defer capital gains tax on the sale indefinitely. Most business owners who are also the founders of the business have substantial appreciation in the business from their original basis which otherwise results in substantial capital gains’ tax upon the sale.
  • Using an ESOP as an exit strategy rather than an outright sale to a third party is much quicker, less time consuming, less stressful, and usually nets out as much or more for the selling owner.
  • As of 1-1-98 Subchapter S Corporations can have ESOP’s, creating the potential for complete elimination of federal and state income taxes at both the corporate and shareholder levels.
  • For advisors to business owner clients, whether you are an attorney, a CPA, or other professional, the likelihood of a continuing relationship with your client is much greater with an ESOP than a sale to a third party.
Is an ESOP a good fit for your company?

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