Selling to an ESOP as an Inside Buyout
The October 2012 Journal of Accountancy has a nice article on Selling to an ESOP as an inside buyout. Plan now for inside buyouts examines the business transition issues when transferring ownership to an ESOP as a Built-In Buyer. It also examines issues when selling to other internal buyers such as management, key employees, or family members.
A major benefit of selling to an insider is that the seller(s) have control over the transaction process (timing, terms, etc.). With only 83 days left before tax rates are scheduled to increase, selling to an inside buyer may be the only practical way to transition a business yet in 2012. Remember that Selling to an ESOP in 2012 Increases After-Tax Proceeds by 43%.
The article highlights that Selling to an ESOP is Always a Stock Sale and discusses the related tax and legal benefits. It also mentions ESOP Research that documents how ESOP companies outperform their non-ESOP counterparts and the low ESOP Loan Default Rates.
The article also shares the benefits of Selling to an ESOP for both CPAs in practice and in industry:
CPAs can take an active role by helping business owners determine their best option. Inside buyouts are attractive to CPA firms because of the expanded opportunity to provide strategic and tax planning assistance and the likelihood of retaining the client long term.
Employee cooperatives or ESOPs spread ownership among a larger portion of the company and can have several tax advantages for the seller. Strategic and well-timed transfers to family members have the potential to take advantage of the current large unified estate and gift tax exclusion.
Depending on the complexity of the transaction, CPAs might need to enlist the help of outside experts. Valuation is one critical part of the buyout, and an independent voice is needed if experience in that area is lacking.
CPAs in industry are attracted to inside buyouts because, as key financial executives, they have an opportunity for equity participation in the future of their employer. Depending on the skills demonstrated to the company, industry members could negotiate an attractive package of participation.