ESOP Practice

Case Study: ESOPs Are a Win-Win

Opportunity: Our client established a clothing company approximately 20 years ago. Now he has decided that it is time to move on to the next stage of life. He had two main objectives when considering the succession planning options for his business:

  1. to obtain adequate monetary consideration for the value of the business (he felt the business was worth $4,000,000), and
  2. to protect the jobs of his long standing staff.

Action: He explored and rejected selling to a private equity firm because the owners of the private equity firm would benefit more than he would. He discussed and rejected selling to one of his competitors because his staff would lose their jobs and his competitor would not meet his asking price. Then, we began discussing the possibility of creating an ESOP and selling his stock to it.

Result: Due to the tax advantages afforded by ESOPs, an independent valuation company valued the business at $6,000,000. Our client received 50% of the purchase price at closing and a promissory note for the balance. In addition to the purchase price, he received warrants to purchase 35% of the stock in the company at a future date. Our client is not paying any tax on the sale proceeds he received for his stock because he is investing in Qualified Replacement Property under Section 1042 of the Internal Revenue Code.