ESOP succession planning provides a flexible, tax-advantaged path for business transitions that benefits both owners and employees.
Why an ESOP Exit Strategy Is a Smart Choice
When considering exit strategies, most business owners want to maximize the value of what they’ve built without sacrificing their legacy, company culture, or employee loyalty.
That’s why Employee Stock Ownership Plans (ESOPs) are becoming an increasingly popular option for business transition and succession planning.
At Lazear, we’ve worked with business owners across many industries, including construction, manufacturing, food and agriculture, logistics, and transportation, who chose ESOPs because they helped meet personal and professional goals.
Key ESOP Advantages for Business Owners
Preserving Company Culture and Legacy
Owners often want to reward employees who contributed to the company’s growth and avoid selling to competitors who might disrupt the culture. According to NCEO research, employee-owned companies (including ESOPs) experience 2 to 3 times higher productivity and revenue growth compared to non-employee-owned companies. Additionally, ESOP firms tend to have lower turnover rates and higher employee engagement, which fuels sustained growth.
ESOPs protect the business’s legacy by keeping leadership stable and decision-making local.
A Reliable Buyer at Fair-Market-Value
An ESOP acts as a built-in buyer by purchasing company stock at fair market value. Employees do not invest their own money, and the company remains independently operated.
Unmatched Tax Benefits for Owners and Companies
An ESOP can be one of the most tax-advantaged ways to sell a business, offering significant benefits for both he selling shareholder(s) and the company.
- Selling Shareholder: Internal Revenue Code Section 1042 allows shareholders who sell their company to an ESOP to defer—and ultimately eliminate—the capital gains tax on the sale. This well-established tax strategy significantly increases after-tax proceeds, potentially saving up to 33% in combined federal and state taxes.
- Company: 100% ESOP-owned companies pay no federal and, in most states, income tax. This tax savings frees up cash to be used in paying the seller, other debt, and growing the equity in the business for the benefit of the employees with shares in the ESOP.
Flexible Transition Opportunities
One of the most compelling features of an ESOP is flexibility. After an ESOP transition, some owners remain fully engaged in day-to-day operations, while others shift to a strategic advisory role to guide future growth.
A recent Fortune article shares the story of George Schaefer, who sold his family’s 112-year-old construction business to employees through an ESOP. Five years later, he remains involved in business development and employee engagement by choice.
“I made the ESOP decision for employees like Mike Sisco, a production engineering specialist who ensures our production processes are correctly followed. He’s got a focus on detail born from nearly four decades at Stockwell. It’s people like Mike, and others, who have been with the company for 30 years or more, who made this company successful and that I thought of as I pondered Stockwell’s future.
For me, it ended up being an easy decision. I had become so involved on the production floor with our people and felt that if I could provide opportunity for them, it was a no-brainer. As business owners, we don’t need the last nickel. We should be open to sharing some of the wealth.”
ESOPs Offer More Than Just an Exit Strategy
A key advantage of ESOPs is that they aren’t just an exit strategy; they’re a transition into a new chapter where former owners can remain involved and support the company’s continued success alongside the employees who helped build it.
Talk to Our Team About Your ESOP Options
Many business owners with a solid succession plan and confidence in their company’s future cash flow find that ESOPs offer a flexible, tax-advantaged way to transfer ownership while staying connected to the business. For these reasons, ESOPs should be a top consideration when planning a business transition.
To discuss your business succession options in more detail, contact a member of our team.
