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7 Benefits of Turning Your Company Into An ESOP

An Employee Stock Ownership Plan (ESOP) is a powerful and often overlooked tool for business owners looking to sell all or part of their business. ESOPs pass business ownership to the employees through shares of stock set up in a trust. Employees aren’t personally responsible for buying shares in the company; the stock is purchased with company funds. Companies that have converted to an ESOP report positive impacts to management, employees, and overall company performance.

Selling your company through an ESOP allows you to achieve liquidity while protecting the culture of your business. Creating wealth for both parties, ESOPs are a win-win for business owners and employees alike. At Idaho Trust, we believe that selling your business to an ESOP could be the exit strategy you’ve been looking for. Here are the 7 benefits of choosing an ESOP for your business in Boise, Idaho.

1. Secure Fair Market Value

Selling your business to an ESOP takes away the stress of negotiating a sales price and any doubt as to whether you made the best deal. By law, ESOPs must pay fair market value to the selling owners. An independent valuation is performed to determine fair market value, often six times the amount of your EBITDA. Sellers cannot demand more than the fair market value, and the ESOP cannot offer less. If you want to sell your business for what it is worth, selling to an ESOP is an easy way to guarantee that you receive fair market value.

2. Set the Pace

Transforming your business into an ESOP isn’t an all or nothing arrangement. A major benefit of selling to an ESOP is the ability to sell partial stakes and maintain a limited role in the company. You can continue to sell over time, easing your transition away from the leadership team. If your business has multiple owners or partners, no one is forced to sell to the ESOP. The ESOP can purchase stakes in the company from just the owners that wish to sell. Owners that sell to an ESOP often enjoy maintaining a role in the company as board members or consultants.

3. Increase Productivity

Selling to your employees is good for business. One of the benefits of an employee stock exchange is the increased engagement team members show once they own a stake in the company’s success. An ownership culture fosters collaboration and teamwork as employees work together towards shared goals.

In 2000, Rutgers University found that ESOPs increase annual sales roughly 2.4% per year. In an ESOP-owned company, product sales don’t only benefit the company -- they add to the value of employee shares. Employees are incentivized to increase productivity because they can see the reward in their individual ESOP account balances.

1. Reduce Taxes

The tax benefits of selling your business to employees include tax exemption, tax deferment, and a reduced tax burden. C corporation ESOP contributions are made with pre-tax dollars, allowing selling owners to defer taxation. S corporations that are completely ESOP owned are tax-exempt and therefore not subject to federal income tax. If you choose to sell to an ESOP, capital gains tax can be deferred with a Section 1042 exchange. Converting to an ESOP significantly reduces your tax burden and creates positive cash flow that can help your business grow.

The tax implications of turning your company into an ESOP benefit both the selling owners and company employees. Be sure to consult a tax professional to maximize the tax advantages of converting your business to an ESOP.

1. Protect Your Community

At Idaho Trust Bank, we know how important community is to small businesses. ESOP-owned companies benefit the local community by providing stability throughout the business sale. 

• Employee Stability - Families are supported throughout the change in ownership by avoiding restructuring or relocation of the business by an outside buyer.
• Vendor Stability - Other local businesses are able to maintain their relationships with your company without fear that an outside buyer will contract with new vendors.
• Customer Stability - Your local customers won’t experience a change in the quality of your product or service as a result of the business sale. Your company can continue to provide “business as usual” as it converts to an ESOP.

Because ESOP sales are often gradual transitions, community relationships are preserved and carried over to the new ownership. Your company remains locally-owned and can continue to provide charitable support to community schools and nonprofit organizations.

2. Retain Employees

The cost of attracting and training employees can take a toll on your company’s budget. Constant turnover leads to expensive onboarding that doesn't pay off before the employee leaves for the next gig. Selling to an ESOP can help prevent a revolving door of talent and improve the company balance sheet.

According to the National Center for Employee Ownership (NCEO), ESOP leaders report voluntary quit rates of their employees at roughly one-third of the national average. Employees are more likely to stay with a company if they have an ownership stake in an ESOP. By reducing the costs associated with high turnover rates, ESOPs help ensure your company will thrive for years to come.

1. Create a Legacy

You worked hard to create your business, and the idea of selling it might bring mixed emotions. When you sell to an ESOP, you don’t have to worry about new owners splitting it up, relocating it to another community, or changing your product.

Your trusted employees are now the owners of your business, a reward for their hard work and dedication. While some changes over time are inevitable, selling to an ESOP can help prevent immediate changes to the core values and culture you have built. The identity of your business doesn’t change in the sale which strengthens your legacy in the community.

Your Business Means Everything

Converting to an ESOP can improve company performance, increase employee satisfaction, and create significant financial advantages. If you’ve created a leadership team and company culture that you wish to protect, an ESOP can help ensure that your vision for your company is preserved after you step down.

If you are considering taking a step back from your business in Boise or Coeur d'Alene, our business lenders can help. We’ll take the time to explore your options and find the right exit strategy for you, your business partners, and your employees. Stop by an Idaho Trust Bank branch or speak with one of our business bankers today. We offer the best business banking solutions for every stage of business ownership.