This article was originally published on July 11, 2019
An employee stock ownership plan (ESOP) is a one-of-a-kind tool for transferring ownership in closely held businesses, allowing the exiting shareholders to actually sell their interest to the ESOP (effectively, to the employees). This aspect is particularly attractive to owners with a limited pool of outside buyers. Plus, negotiating with an ESOP may be less burdensome than negotiating a sale with an outside party.
As a qualified retirement plan, an ESOP also offers unique advantages to employees. In many cases, ESOPs may be used to enhance company culture and performance. Additionally, the ability for the ESOP to borrow money to buy employer stock and ESOP-related tax incentives make it a strategy worth considering.
This article takes a closer look at the use of ESOPs for succession planning purposes, providing an overview of how an ESOP works and when it should be considered.