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ESOP Succession Planning

Establishing a succession plan beneficial to you and your employees is vital. You may be aware of more traditional methods of transferring ownership, such as selling to a third party; however, selling to an employee stock ownership plan (ESOP) may be the right solution for your company. An ESOP allows you to retain control of the business and protects the employment of valued workers, creating a win-win situation for your company and your employees.

What is an ESOP?

An ESOP allows you to sell all or a portion of your investment in the company while retaining business continuity and control of business decisions and operations. An ESOP is a qualified retirement plan allowing eligible employees to receive an annual allocation of stock. Stock acquired by an ESOP is legally held in an ESOP trust, and employees are simply beneficial owners in the value of the stock. Employees do not legally own the stock and they may only vote in a few major events, such as the sale of company assets, mergers, etc. An ESOP does not change the operations or management of the company.

ESOP Tax Benefits

Because of certain tax benefits, the ESOP purchase essentially is funded with pre-tax dollars. One advantage with leveraged ESOPs (those with debt) is principal payments made on the acquisition debt are tax deductible. Further, S corporation earnings attributable to an ESOP are exempt from federal and state income taxes (except in states that do not recognize S corp status). A company that is 100 percent ESOP-owned and taxed as an S corp is exempt from federal and most state income tax, regardless of profitability. An ESOP provides a market to sell your stock at fair value, which generally results in greater tax advantages than you would receive by selling company assets. Further, if certain requirements are met, the sale of your stock may be tax-deferred or possibly tax-free. (You must reinvest in a qualified replacement property within 12 months of the sale date.)

Existing ESOP Companies

Existing ESOP companies face unique opportunities and challenges. Many mature ESOPs have benefited from acquisitions, realizing higher returns than non-ESOP companies through enhanced tax savings on future profits. These companies also can provide the sellers unique tax advantages, providing additional leverage during the negotiation process.

As ESOP companies mature, it is important to continuously monitor the structure of the ESOP and adapt to legislative changes, repurchase liability issues and employee benefit issues. Mature ESOPs also need to evaluate available executive compensation plans so they can retain and attract top talent, an element critical to the company's success.

Why Choose BKD?

BKD understands privately owned businesses and the unique succession issues they face. During the past decade, BKD's ESOP advisory group has acted as the principal coordinator in closing more than $2.7 billion in leveraged ESOP transactions. We work with some of the largest 100 percent ESOP-owned S corps in the country, providing accounting, tax and advisory services ranging from acquisition assistance to executive compensation design. BKD also stays abreast of legislative changes that could affect ESOPs, advising companies about the potential impact to their organization.

BKD's ESOP solutions include:

Cara Benningfield


Cara Benningfield


Construction & Real Estate
Manufacturing & Distribution

360 E. 8th Avenue, Suite 201
P.O. Box 1196
Bowling Green, KY 42102-1196 (42101)

Bowling Green

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