There are several reasons that come up for why you shouldn’t do an ESOP:
- They cost too much
- They are too complicated
- My employees don’t have enough cash for the buyout
- There has been some litigation with ESOPs
- My current advisor is advising against using an ESOP.
However, let’s examine each reason. You didn’t get this far in your business without doing your own research and looking into the facts and contrary opinions.
REASON #1: ESOPs cost too much
ESOPs do cost some money to setup and maintain. An ESOP might cost around 100k-300k to setup with annual costs of around 20k-30k. However this cost is minuscule compared to the typical costs of selling your business. Consider this: You’ve worked hard to build up your company and it is now worth 60 million dollars. The taxes to eventually sell this business are an estimated 20 million dollars. In reality, ESOPs are one of the most cost effective ways to pass on your business. You spend a relatively small amount of money in advance to literally save millions in taxes later on.
REASON #2: ESOPs are too complicated
ESOPS are complicated but not too much more complicated than other retirement plans. Selling your business to a third party is usually more complicated than setting up an ESOP. Although ESOPs might be a little complicated, the enormous tax savings make it well worth your time to investigate them through an experienced advisor.
REASON #3: My employees don’t have enough cash for the buyout
This reason that comes up is completely misguided. The employees actually do not use their own money to buy the company for an ESOP. It is funded by corporate pretax contributions to a trust. Regardless of how much money your employees have, an ESOP can be implemented.
REASON #4: There has been a lot of litigation with ESOPs.
This reason once again does not have much merit. There really hasn’t been that much litigation revolving around ESOPs. From 2012 to 2018, the Department of Labor took less than 25 ESOP cases nationwide to litigate in court. The fear of litigation should not deter you from looking into and setting up an ESOP, especially with millions of dollars in tax savings.
REASON #5: My current advisor is advising against using an ESOP.
ESOPs are a specialized area and not all advisors understand their value and how they work. The default for some advisors when they don’t fully understand something is to recommend against it. That’s why it is important to examine ESOPs with an advisor who is experienced with ESOPs. In order to understand ESOPs, an advisor has to invest hundreds of hours into the area.
Now could be the best time to consider an ESOP. Call me. 213-283-9500 or 916-362-4040