Personal Finance

Selling Your Company to Your Employees

Selling Your Business to Your Employees Using an Employee Stock Ownership Plan
Some business owners plan to sell their business to enable their retirement. Even owners who intend to remain active in their business may want to diversify their holdings simply for the safety it could provide. Of course, choosing a business partner, while allowing you to diversify your investments, can be risky, especially if it involves giving up some level of management control.

Succession planning and estate valuation tends to be made easier where a potential purchaser has already been identified. An ideal situation for some business owners is to create some liquidity from the value of their business without incurring capital gains, and having the business ownership interests stay in friendly hands.

Explore the Possibility of an Employee Stock Option Plan (ESOP)
A possibility that can be worth exploring involves selling all or part of your business to an Employee Stock Option Plan (ESOP). When establishing an ESOP, you must comply with a number of technical requirements and can have significant transaction costs due to expenses such as an appraisal and potentially an audit. The stock sold to an ESOP has to have been owned for at least three years1. The ESOP has to own at least 30% of the company after the deal2.

Potential Tax Benefits of an ESOP
Some very attractive tax benefits which can justify the ESOP are available to sellers. For instance, tax rules allow a business to be sold to an ESOP by a seller who could avoid capital gains tax by investing the proceeds in Qualified Replacement Property (QRP)3.

As long as the seller holds onto the QRP, the taxable gain on the sale of business will be deferred. The seller will have a lower basis in the QRP4. And, if the QRP is sold or otherwise disposed of during the seller’s lifetime, the deferred gain will be recaptured5. Special financial products have been developed which make a QRP attractive, offering business sellers a balance of investment participation and security.

When a sale to an ESOP involves leveraging, both the interest paid on the loan and the principal repayments can be deductible by the business.

Consult with Your Attorney and Accountant When Considering an ESOP
Selling to an ESOP should be carefully planned, with advice from the appropriate legal and tax professionals. Ideally, exploring and evaluating different alternatives in selling a business might take several years.

We can help you understand your options and determine a comprehensive plan fit for you and your business’ needs. Contact us today to get started.

1. IRC Sec 1042(b)(4)
2. IRC Sec 1042(b)(2)
3. IRC Sec 1042(a)
4. IRC Sec 1042(d)
5. IRC Sec 1042(e)

Michael Repak
Vice President/Senior Estate Planner

Mike provides advice and guidance in all aspects of financial, tax, and estate planning issues. He earned his Bachelor’s degree from William Paterson University in Wayne, New Jersey, and has a Master’s degree from the University of Wisconsin in Madison, Wisconsin. He has a CPA/PFS credential, and Series 7 and 66 securities licenses. He received his J.D. from the University of Florida and his LL.M. in Tax Law from NYU. 

He has been an adjunct professor in the MBA program at Temple University and is a sought-after speaker for professional conferences and events. He is also frequently featured as a Money Doctor on, the public education site of the American Institute of Certified Public Accountants. Mr. Repak has served on several non-profit and civic boards, is a graduate of Leadership Philadelphia, and a member of the Union League of Philadelphia.

Janney Montgomery Scott LLC, its affiliates, and its employees are not in the business of providing tax, regulatory, accounting, or legal advice. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any taxpayer for the purpose of avoiding tax penalties. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.

Share this article