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Value Creation Blog

6 Reasons Business Owners Don’t Do ESOP’s

Posted by Josh Patrick

ESOP

 

 

 

Every business owner I talk with is always fascinated with ESOP’s. (Employee Stock Ownership Programs.)  While these owners are fascinated with the concept of an ESOP almost none of them ever install one in their company.

At first blush an ESOP sounds like a great thing:

You get to sell your company. 

In some instances the company can run tax-free.

You can continue running the company after you sell it.

Sometimes the proceeds from the sale can be tax-free.

So, if there are all of these great reasons that owners might want to do an ESOP, why aren’t more put in place? 

ESOP’s are complicated.  Many business owners I know hate complexity.  When they find out how complicated and expensive ESOP’s are to install (between $50,000 and $150,000) they decide an ESOP is not for them.

There isn’t anyone to run the company.  Before an owner can have an ESOP they must have developed a second line of management who can run the company.  Many owners have never developed managers who can independently run the company without the owners input.  These owners will pass on having an ESOP.

The owner can sell the business for more money to an outsider.  When a business is sold to an ESOP it must be done using fair market value.  When the owner sees what the fair market value number is for the business they often find they can sell the business to an outside buyer for a much larger number.  These owners will often pass on the concept.

The business isn’t profitable enough.  The cost of installing an ESOP is very high.  Many business owners decide the cost is just too much for their business.  If the business is only making $100,000 to $300,000 per year the cost of installing and maintaining an ESOP doesn’t make sense.

The business isn’t big enough.  To install an ESOP and have it be a fully tax deferred entity you usually have to have forty or more employees.  There are relatively few businesses that has this many people.  For these companies, an ESOP isn’t practical. 

The owner spends too much time working in the business.  Installing an ESOP is a very time consuming project.  Many business owners spend so much time in day-to-day operations that they don’t have the time to work on an ESOP.  These owners will often pass because they just don’t have the time to concentrate on a project of this size.

At the end of the day, owners pass because ESOP’s are too expensive, too time consuming and or don’t provide the value that owners expected. 

There are companies that ESOP’s are a perfect fit.  I think that’s why I continue to have the ESOP conversation.  An owner needs to hear about them so they can make their own mind up about whether an ESOP is right for them.

Have you ever had an ESOP conversation with anyone?  If so, what were your thoughts?  I’d love to hear from you on this topic.  Please contact me at Jpatrick@stage2planning.com or click here to set a time for us to talk.

Josh Patrick

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Topics: ESOP, business exit planning, succession planning

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