ESOPs: An Attractive Strategy for Liquidity
By: Erin D. Hollis, ASA, CDBV
For thousands of business owners across the US, a high percentage of their net worth is tied up in their company. Many of these business owners would prefer to create liquidity without selling the business outright or diluting their voting control. There are also business owners who have found their business hard to sell at a price they feel is fair. One way to achieve liquidity for these business owners is to implement an Employee Stock Ownership Plan (ESOP).
An ESOP is a qualified, defined contribution employee benefit plan, under Sections 401(a) and 4975(e) (7) of the Internal Revenue Code, which invests in the securities of a sponsoring employer company. An ESOP is unique from other qualified plans in that it may borrow money and engage in related party transactions to do so. As such, the ESOP functions as a corporate finance tool for creating ownership liquidity in a tax-favored manner.
Some common uses of an ESOP include:
1. Creating (partial or full) liquidity for a shareholder(s) with the option of retaining voting control