Intentional Growth

Tax Advantages of an ESOP Exit Strategy


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Today’s guest is Dan Zugell. Dan is the ESOP guy. Dan works for Business Transition Advisors and has been doing ESOPs for 19 years. The reason I wanted to have Dan on the show is because there are a lot of different messages about ESOPs out there. I wanted to get the full ESOP 101. Dan explains law changes, previous failures, how to value the business, payouts, finance structure and more. He totally demystifies the process including what life is like before and after ESOPs.

In This Episode You’ll Learn:
  • Dan shares how he got involved working with ESOPs by accident. He was helping a business owner exit and discovered that ESOPs were a great way to exit. He ended up starting and running the ESOP department at MetLife.
  • Employee Stock Ownership Plan is a qualified retirement plan. The primary investment is the stock of the company. There are a lot of tax benefits for everyone involved. Employees get shares with no out of pocket costs.
  • Good candidates for ESOPs need a company worth 5 million or more with 20 or more employees and about a million in payroll.
  • They are also an excellent vehicle for passing a business from one generation to another.
  • Dan shares concerns that may rise when looking into ESOPs, and how they are an internal sale with no outside buyer or influence.
  • Tax advantages include deferred capital gains tax, the company gets to write off the sale over a period of years, the company becomes an S Corporation and the profits aren’t taxed by federal or state bodies, and estate planning advantages.
  • The ESOP borrows money from a bank and buys the company stock. The company uses the tax savings to make ESOP contributions that pay off the loan.
  • Dan’s company takes the ESOPs to the banks. Financing is a combination of a bank loan and the seller taking back a portion of the note at market rate interest.
  • What life is like before and after an ESOP. The company owner can still sit on the board and run the company after establishing the ESOP. They even get board fees, salaries, and perks, but they can’t take money out of the company for personal use.  
  • How to pick a trustee and how they ask for the financials.  
  • The importance of preparing for liability and paying employees when they retire by making sure the company knows their numbers and plans properly.
  • Share allocation. The shares are given out over time. An example would be 5 shares a year over 30 years.
  • Takeaways:
    1. The amount of control you have over the process of an ESOP with the structure and financing enables you to reverse engineer your goals into the actual structure.  
    2. You still have control over running the business after a properly structured ESOP s
    3. ...more
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      Intentional GrowthBy Arkona - Intentional Growth