Is Now the Right Time For an ESOP? | ETF Trends

By Jerry Ripperger, VP of Consulting, the Principal Financial Group, Principal Securities Registered Representative

It’s official – we are in a recession according to the National Bureau of Economic Research. This has impacted almost every company in the United States, including those that were looking to implement an Employee Stock Ownership Plan (ESOP).

Business owners have asked if the ESOP is still the right approach for them. If so, what about timing? Should they wait until the economy rebounds? These are all very good questions and relevant in this time of uncertainty.

There are several factors that should be considered when evaluating options.

  1. The recession has impacted businesses differently. Those that have been negatively affected tend to get more of the attention from the media. But it is important to remember that many companies are adding employees and setting sales records. When talking with business owners it is important to understand the specific impacts to their industry and organization.
  2. The recession impacts many industries, geographies, and companies. The question is how has the value of the specific company changed relative to the market in total? If the company value has fallen, but the market has fallen, too, it could be beneficial to sell now and reinvest in the depressed market.
  3. Many ESOP transactions can be structured so that the selling owner can benefit from future upside growth in value. This is often done by using seller financing and issuing warrants as part of the transaction. It is important that the company work closely with their ESOP transaction team (valuation company, attorney, accountant, financial advisor, and ESOP consultant) when exploring this option.
  4. The significant tax advantages provided through the ESOP ownership structure continue to exist and can provide benefits to selling owners and companies. It is important to quantify tax impacts to fully understand proceeds from any sale.
  5. During recessions companies often find it difficult to find a buyer. The ESOP allows the company to create a buyer that can pay up to fair market value for the company. The ESOP may be a good alternative for those that still have a need to sell.
  6. Whether the economy is going through an expansion or a contraction, we are all getting older. A company sale is typically not just a financial transaction. It is also a lifestyle change. Many owners will want to continue moving ahead with looking at sales options for lifestyle purposes.

These discussions are very similar in many ways to those that financial advisors have with their clients daily. This could be a good time to reach out to your business owner clients to see if they would like any help. For more information on ESOPs, check out this webpage.

In addition to blogging here, I also tweet regularly about topics of interest to ESOPs.  Follow @twitter 

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The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.