Employee stock ownership plans may be retirement financing option

Updated 3/14/2016 7:59 AM

Ken Serwinski says the best opportunity to sell your business happens "when someone comes to the door with a wheelbarrow of cash." He admits, however, those situations don't happen very often.

On the other hand, if you need proceeds from the sale of your business to fund your retirement, perhaps you should explore an ESOP (employee stock ownership plan). ESOPs can be an effective way to finance your hopefully golden years.


An ESOP is a retirement plan that allows the business owner to sell his, or her, stock -- part or all -- to the plan on a tax-advantaged basis. Serwinski, CEO of Prairie Capital Advisors Inc., an Oakbrook Terrace business that, appropriately, is employee owned, defines ESOPs as "qualified retirement plans that (are) a tax-effective ownership transfer and a retirement benefit for employees."

The Oakland, CA-based National Center for Employee Ownership notes that the most important ESOP uses are to buy the shares of the departing owner, which the ESOP often can do by borrowing money at a low after-tax cost, and the creation of an additional employee benefit.

ESOPs, the NCEO says, have "significant tax benefits" that include the fact that company contributions of both stock and cash to the ESOP are tax deductible. Check "online articles and news" at www.nceo.org.

There even are hints that ESOPs can help change workplace culture. Although ESOPs do not require any different treatment of employees, "a more participative approach ... makes for a workplace that (can be) more productive," NCEO says.

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The employee benefit factor sometimes is overlooked, at least initially. While proceeds from the sale of the owner's stock to the trust set up to administer the ESOP typically provides owner retirement funding, employee participation in an ESOP can be an effective retention tool that helps keep valued employees tied to the business.

If the concept is intriguing, know that you'll have to do some homework early on: ESOPs are complicated, and the rules are strict:

• Website material at Prairie Capital Advisors (www.prairiecap.com) lists valuation, banking, tax law and ERISA (the Employee Retirement Income Security Act of 1974) compliance as just a few of the areas where awareness and experience will be needed.

• Ultimately, the effectiveness of the ESOP option rests on the underlying value of the company, a circumstance that is equally true if you choose to sell the business in a more traditional broker-supported fashion.

According to Prairie Capital Advisors' web material, the company's value will be based largely upon the business model, which includes "brand recognition, unique history, differentiated product ... a diverse customer base and recurring revenue."


Also important: The company's finances and growth opportunities, the competitive nature of the marketplace, and the state of the U.S. economy.

That's a fairly exhaustive list, one reason that Serwinski says ESOPs are most effective in companies "where there is good management and a good operating model."

• Follow Jim Kendall on LinkedIn and Twitter. Write him at Jim@kendallcom.com. Listen to Jim's Business Owners' Pod Talk at www.kendallcom.com/podcast. © 2016 Kendall Communications Inc.

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