For some business owners, let’s call them the “able but not quite ready to retire” business owners, the thought of handing off the business they built and walking away is an unsettling, if not gut-wrenching, decision. For these business owners that have also established their business as a corporation (not an option for partnerships), an Employee Stock Ownership Plan (or ESOP) may provide a better retirement option.
Selling your business when it comes time (or nearly time) to retire is a bittersweet moment for a number of reasons. The bitter can come in entirely different ways. For example, selling the business can either mean saying goodbye to it forever or, what may be worse, selling yourself as an “employee” to the company you no longer own for those last years leading up to retirement.
Alternatively, an ESOP may be an interesting option to consider to sweeten up that bittersweet decision. Curious? Take a look at a recent article in Forbes titled “How ESOPs Let Employees Take Stock In Your Retirement.”
The first question for the uninitiated (quite forgivably) is what is an ESOP? An ESOP, or “Employee Stock Option Plan,” is technically a retirement plan. However, unlike most retirement plans an ESOP effectively works to balance the retirement of the owner and the employees by balancing ownership and control.
Here is how it works: The owner essentially sells the stock of the corporation to the employees, but retains much of the corporate structure to control and run the business. In the meantime, the stock itself becomes the retirement plan for the employees who are now working to build the business that is their retirement.
Now, clearly there are some important moving pieces to consider regarding whether your business is suitable for an ESOP. When an ESOP is right, it can be a hole-in-one for all concerned. Take a look at the original article for a review of some of those “moving parts” that can make an ESOP right for a business, or a business right for an ESOP.
If an ESOP sounds like a good fit for you and your business, then be sure to get competent counsel. This is not a do-it-yourself project.
Reference: Forbes (December 27, 2013) “How ESOPs Let Employees Take Stock In Your Retirement”