Creating some certainty in an uncertain world

…but in this world nothing can be said to be certain except death and taxes.  Benjamin Franklin, 1789. 

These words remain as true today as they were over 200 years ago in Benjamin Franklin’s letter to Jean-Baptiste Leroy. What is less uncertain these days is the amount of taxes we’ll pay as time goes on—especially for business owners.

Tax rates are but one of the many uncertainties of running a business. Owners wonder: Will there be a buyer for my business when it is time to sell? Will anyone want to buy a minority position in the company? Will I be able to sell the company for fair market value? Is there a way to keep the company in the family and generate cash for retirement? Will I be able to sell when I want and only as much as I want? And, of course, what will the tax rate be on the sale of the company?   

While you can’t predict the future, you can help introduce some certainty into their uncertain world with an Employee Stock Ownership Plan. An ESOP is a qualified retirement plan that is invested primarily in the stock of the sponsoring company. ESOPs are unique in that they can borrow money to purchase the stock from the selling shareholders. ESOPs are useful for business owners looking to diversify their holdings, plan for the succession of their business, or help their employees prepare for retirement. They help answer these key questions:

  • Will there be a buyer for my business when it comes time to sell? The ESOP creates a buyer that can purchase all or a portion of the company from the selling shareholders. There is no need to search for a purchaser or hire a business broker.  The business owner simply establishes the ESOP. 
  • Will anyone want to buy a minority position in the company? The ESOP can own as much or as little of the company as the owner desires. The ESOP may start as a minority interest and then later own a majority or all of the company. 
  • Will I be able to sell the company for fair market value? The ESOP can pay up to fair market value for the company as determined by an independent valuation. 
  • Is there a way to keep the company in the family and generate cash for retirement? An ESOP can be a useful tool for business owners looking to retain control of their company and generate liquidity. The owner may sell a portion of the company to the ESOP to generate cash for gift or estate tax purposes, to finance retirement, or a variety of other uses. In addition, an ESOP can be used to allow one or more family members to exit the business without the remaining members having to buy their shares. 
  • Will I be able to sell when I want and only as much as I want? An ESOP provides the business owner with flexibility to meet their specific needs. The owner decides how much of the company to sell and when to sell it. They could sell a portion now to the ESOP to generate cash to diversify their holdings and sell the rest over time or all at once  as part of their succession plan. 
  • What will the tax rate be on the sale of the company? That remains unknown but the ESOP offers special tax advantages that can soften the blow of any taxes on the transaction itself. 

I guess Ben Franklin could have added one more thing to his now famous quote: Nothing is more certain than death, taxes and uncertainty. Although there are no guarantees, an employee stock ownership plan is one way to create more certainty in the unpredictable world of business ownership. 

Company stock is not a pooled investment. Stock may experience greater volatility and should not be directly compared to investment options that have a more diversified investment mix. It is not intended to serve as a complete investment program by itself.

While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that none of the member companies of The Principal are rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.

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.

About the Author
Jerry Ripperger

Jerry Ripperger

Jerry Ripperger is vice president of consulting for retirement and investment services at the Principal Financial Group. For more than 24 years, he has been involved in developing and implementing employee benefit programs for owners and employees of growing businesses, and currently specializes in Employee Stock Ownership Programs. Ripperger tours the country educating advisors about the benefits of introducing ESOPs to their business owner clients. Ripperger's articles have been published in HR Magazine, HR.com, Employee Benefit News, Broker World, and Best’s Review and his media experience includes the Associated Press, New York Times, BusinessWeek, Forbes, CNN/Money, Dow Jones, and the Wall Street Journal. He can be reached at ripperger.jerry@principal.com.

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