Employee Stock Ownership Plans in Business Succession Planning

Small business succession planning is a major challenge and opportunity for community economic development. There are significant and some negative tax consequences following the death of an owner without an estate plan. The sale of existing businesses, even if successful, could result in business relocation, dissolution by competitors, or collapse under absentee owners. The lack of succession planning for small businesses is also a reflection of the lack of resources available for planning and the lack of attention to succession details that are typically delayed when dealing with the pressing issues of ongoing business.

Through the use of a leveraged ESOP, a bank will lend funds to the ESOP that is collateralized by the company’s assets. The ESOP uses the money to buy shares of the company. The owner then transfers the shares to the ESOP, and the company makes monthly contributions to the ESOP equal to the loan payments. A trustee is appointed to protect the interests of the employees while ensuring that the business is purchased at a reasonable amount. Before establishing an ESOP, the owner must engage the services of a business valuation analyst to ensure a valid amount for the business.

The ESOP offers a means of increasing proper control of the business, as well as transferring ownership. In an ESOP, the trustee transfers the workers’ voting rights to the workers, who will instruct the trustee how to vote the shares they own before they have full control of the company. Building ESOPs depends on the willingness of both workers and owners to follow that path. Nor can cooperation be imposed.

The various professional service providers would be interested in educating small business owners about ESOPs. The ESOP would become one of the financial products used by bankers, lawyers, and accountants with their small business clients. The ESOP not only provides a way for these professionals to market services, but the ESOPs maintain the business as a long-term customer for the benefit of the provider and the community.