If you are like most business owners, you probably have a preconceived idea that an ESOP is just another company provided employee benefit like a 401(k).

True, they are considered as such by the IRS under the Employee Retirement Income Security Act (ERISA) of 1974; and, as in most benefit plans, employers contribute to the plan and employees receive benefits when they retire or terminate employment

For now, Forget what you've been told about ESOPs (empty the glass)...

The significant differences are that ESOPs (1) invest primarily in the securities of the sponsoring employer rather than a diversified portfolio and, (2) ESOPs may borrow money ('leveraged' ESOP).

Therefore ESOPs may generate capital for you while at the same time provide you with exceptional tax benefits.


In 1926 stock bonus plans were authorized by the IRS. Some of the early stock bonus plan companies included Sears, J. C. Penney and Proctor & Gamble. Thirty (30) years later an IRS Ruling (1956) allowed stock bonus plans to borrow funds to purchase company stock. With this ruling the first IRS qualified ESOP was created. (Peninsula Newspapers, just in case you're curious).

Very few ESOPs were created between 1956 and 1968 and about two dozen ESOPs had been created by the end of 1968. From 1968 to 1971 about 50 new ESOPs were created each year.

Now it gets a little more interesting...

September 2, 1974, Congress passed the Employee Retirement Income Security Act (ERISA) partly because the Dow Jones Industrial Average was in the 500s, there was no venture capital and there were no mergers or acquisitions. Small businesses found it difficult, if not impossible, to borrow money from their banks. The economy had basically stalled.

(This sounds a little bit like 2003 too.)

Congress endorsed ESOPs in 1974 because they:

  • Minimized taxes for the smaller & struggling companies.
  • Slowed inflation (Employees often accepted less pay in return for equity).
  • Motivated employees and increased productivity.
  • Generated capital.
  • Prevented some unionizations and cut the frequency of strikes.

Congress continued to encourage and promote ESOPs by providing better tax incentives for companies by adding ESOP enhancements in 1976, 1978, 1982 and 1984. Since 1974 more than twenty-four (24) different laws were passed improving ESOPs.

A significant change was made somewhat recently during 1998 allowing sub-chapter 'S' corporations to implement ESOPs. 'S' corporation ESOPs are extraordinary opportunities. Congress encourages 'S' corps to set up ESOPs covering most, if not all, full-time employees with at least 1-year of employment. In some cases the company becomes 100% owned by their ESOP and free from federal income tax... These tax incentives are by design and not loopholes.

This major change went somewhat unnoticed because at the time, our economy was very robust, NYSE & NASDAQ performance was off the charts, millions of dollars in venture capital (VC) money was readily available, 'merger-mania' was running wild and the announcements of new and successful Initial Public Offerings (IPOs) seemed to be occurring on a continual basis.

But the boom is over and many of the conditions present in 1974 are with us again. The markets are down, unemployment is up, VC money is tight, IPOs are virtually non-existent, mergers & acquisitions are few and far between, businesses find it more difficult to borrow money and retiring business owners struggle to find qualified buyers.

We know that an ESOP is an extremely powerful financing tool. And we think it's the best tool for today's business owner seeking a way to "unlock" their equity and turn it into Cash.

As we have explained, ESOPs have been around since 1974 and withstood the test of time. Equally important, the people at Financial Exit Planning, Inc. have withstood the test of time. They have all worked together at a firm which has been providing valuable ESOP transactions since the beginning.

The firm is regarded as an ESOP innovator and respected early adopter having closed its first ESOP transaction in 1974. They have completed many successful ESOPs and "Leveraged" ESOPs since they began more than twenty-five (25) years ago.

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