In this episode, Sheryl offers her expertise on the world of ESOPs and if this is the right exit strategy for you.
Sheryl starts off by explaining to us what an ESOP is. At a high level, an ESOP is an employee stock ownership plan. It is a retirement plan similar to your 401(k) profit sharing plan. However, it is the only retirement plan that is allowed to enter into a loan to purchase employer's stock from selling shareholders. She dives into the main benefits of an ESOP to a selling shareholder, including the ability to defer payment of capital gains.
She also discusses what types of companies usually use ESOPs as an exit strategy, with manufacturing, construction, and professional industries leading this list. Sheryl also addresses common pitfalls that owners should be aware of when it comes to ESOPs, the biggest one being whether they can afford it. Companies need cash flow to function, and since the ESOP is funded by the company, it is important that the company's cash flow is healthy.
She also discusses the concept of a partial ESOP coupled with a later exit. She says this is an option because the ESOP is a ready buyer, and perhaps the only buyer who is willing to take a minority interest in a company.
Lastly, she shares two action items for owners:
1. Go through the ESOP suitability review process to make sure you know what you are getting yourself into before you establish an ESOP.
2. Call Sheryl. She works for the Employee Benefits Law Group, the largest ESOP consulting and legal practice in Southern California. Her direct line is 310-571-8896.
Watch the video episode by clicking the thumbnail below or visit Morton's Youtube Channel.
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Disclosure: Information presented herein is for discussion and illustrative purposes only. The views and opinions expressed by the speakers are as of the date of the recording and are subject to change. These views are not intended as a recommendation to buy or sell any securities, and should not be relied on as financial, tax or legal advice. You should consult with your attorney, finance professional or accountant before implementing any transactions and/or strategies concerning your finances.