Remember the Energizer Bunny? He keeps going and going and going….

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Jerry Ripperger, VP of Consulting, the Principal Financial Group, Princor Registered Representative

Most business owners hope that their business is like the bunny and just keeps on going. But unfortunately, many times that simply isn’t the case. When it comes time to retire they may run into significant difficulties finding a buyer.

They may not have family members that are interested in the business. Even if they have family interested in buying the company, they may not be able to finance the transaction or have the necessary skills to run it. They could employ a gifting strategy but they may need the funds to continue their lifestyle in retirement.

The management team may not want to buy the firm or cannot come up with financing. Competitors may not entertain purchasing the company as they would prefer to try to simply take clients one at a time. As a result, many firms are simply liquidated.

Thousands of business owners have used Employee Stock Ownership Plans (ESOPs) to help keep their business going for years into the future. An ESOP can often overcome these concerns as it allows the selling owner to create a buyer that can pay up to fair market value for the company.

The process is simple. An ESOP is a qualified retirement plan. Therefore, the steps to establish the ESOP (and create a buyer) are similar to other qualified retirement plans, such as a 401(k):

  • The company passes the necessary resolutions to create the ESOP.
  • A trustee is engaged to represent the interests of the ESOP participants.
  • Documents are drafted
    • Trust
    • Plan document
    • Summary Plan Description (SPD)

And….a buyer is created. Note that at no point do the employees have a vote or input into the decision to create the ESOP, but the plan sponsor has the fiduciary responsibility to operate the ESOP in the best interest of the participants since they will be the beneficial owners. The decision to create the ESOP is made by the company and selling owner.

Just like the bunny, the company can keep on going. My next blog post will examine how ownership is transferred to this new owner.

In addition to blogging here, I also tweet regularly about topics of interest to ESOPs. Follow @twitter

The subject matter in this communication is provided with the understanding that The Principal® is not rendering legal, accounting, or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.

Affiliation Disclosures

Insurance products and plan administrative services are provided by Principal Life Insurance Company a member of the Principal Financial Group®, (The Principal®), Des Moines, IA 50392.

© 2015 Principal Financial Services, Inc.