When an ESOP makes sense
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Despite these advantages, ESOPs are not the answer for every business situation. So when should an ESOP be considered?
• The company should be of a sufficient size (usually, at least $2-$2.5 million value). Usually, a business earning $400,000 to $500,000 a year will qualify;
• The business has been profitable in recent years and/or has strong prospects of achieving and maintaining profitability in future years;
• There are at least two to three individuals (other than the owner) capable of assuming a lead management role upon the retirement of the owner;
• Only corporations can sell to an ESOP, however, most business can be converted to a corporation in an inexpensive, tax free conversion.
Other helpful, but not essential, factors are:
• The current owner(s) want to remain involved in the business and slowly transition to less active status;
• The owner wants to reward employees for their loyal years of service;
• The company has a workforce that would be incentivized by ownership in the company.
If you don’t have children in the business and are contemplating retirement in the next 10 to 15 years, you should consider an ESOP as a viable business succession strategy.
Harvey Katz is co-chair of Fox Rothschild’s employee benefits & compensation practice. He can be reached at (212) 878-7976 or firstname.lastname@example.org.