Frequently Asked Questions


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General Questions

  1. Why do I need Financial Exit Planning, Inc.?


Questions Specifically about ESOPs

  1. What are the requirements for an ESOP ?

  2. Will I lose control of my company due to the ESOP ?

  3. Why should I consider an ESOP instead of simply selling ?

  4. Won't my people see my financial information?

  5. How can the employees pay me what my business is worth?

  6. How do I know I'm getting a fair price for my company?

  7. Is an ESOP a permanent thing?

  8. How do I get my employees to understand an ESOP ?


Why Do I Need Financial Exit Planning, Inc. ?

Simply stated, determining & executing the proper exit plan is our area of expertise.  We do this one thing and we do it very well, faster and more cost-effectively than other firms or individual business owners.

Sure, you will eventually figure a way to trade your equity for cash by yourself or with help from your existing financial advisors and legal counsel; but, our experience suggests that something substantial will be left on the table.   This transaction may be your final opportunity to generate real personal wealth from this company. 

If you adopt an ESOP strategy it must be implemented correctly or it may become detrimental to the company in the longer-term.  This should be particularly concerning to you if an ESOP is used as the vehicle to transfer ownership to children.

This may also be a time critical & difficult process requiring 'cool heads' if your need to explore possible exit plans was forced upon you due to unforeseen circumstances (health issue, death of a partner, board dynamics, hostile takeover, other personal reasons). 

So we recommend you work with an expert at this point in the business's life cycle.  We hope that you will select Financial Exit Planning, Inc. to work with you through this transaction.

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What are the Requirements for an ESOP ?

The following criteria must usually be met for an ESOP to be operationally effective under current tax laws:

  • The company must be a Corporation ('C' or 'S')

  • Must be profitable or have evidence that profitability is near

  • Must have sufficient payroll in order to purchase the desired amount of stock from the shareholders

  • The company will have been in business for a number of years

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Will I lose control of my company due to the ESOP ?

NO.  Business owners need to maintain control over their companies.  Management  operating control is specifically protected under the IRS Code.  ESOP participants have voting rights only in some cases of (1) merger or consolidation, (2) recapitalization, (3) reclassification, (4) liquidation, (5) dissolution, and (6) sale of substantially all the assets of the company. This is true regardless of percentage of the company owned by the ESOP.

But, we can structure the ESOP with additional limits and provide a MSOP (Management Stock Ownership Plan) for the owners through the ESOP Trust Agreement so the Board Of Directors comprised of the selling owners retains control on nearly all issues.  There are also other approved methods for retaining operating control of the company.

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Why should I consider an ESOP instead of simply selling?

An ESOP can be a much better alternative to an outright sale to a 3rd party.

  • Today selling is not simple.  In fact it is nearly impossible

  • It's tough to locate a qualified buyer willing to pay a fair price for your stock verses only buying the assets; which is also the highest taxed method of selling a business

  • Most Buyers will usually refuse any special terms

  • A lengthy sales cycle my bring down the value of your company

  • In the services business? Company value may be lost if you leave

  • Competitors will learn of the sale activity:

    • attacking your client base

    • taking market share

    • bring down the value

  • Employees learn of the sale activity:

    • causes production to drop

    • moral & attendance declines

    • safety or quality suffers 

Considering the after-tax proceeds, the seller does better by selling to the ESOP rather than selling to a 3rd party and you have a built in buyer & management team already in place.

Lastly, ESOP & MSOP transactions are ideal if you have a desire to sell your business to a family member or current management.  You can get cash for your equity and simultaneously increase cash flow to the business and create an employee incentive plan.

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Won't my people see my financial information ?

No. You are not required to disclose normal operating and financial data, executive compensation, or the value of the company to ESOP participants.  They only need to be informed annually of the price per share of their stock and the number of shares in their accounts.

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How can my employees pay me what my business is worth ?

We arrange for the financial institution to lend the money to your company which then loans the money to the ESOP Trust.  The ESOP Trust (your employees) pays you for the amount of stock you wish to sell.  Thus, you are then paid full market value for the interest purchased.  There are a variety of funding mechanisms available and most provide preferred rates.  Our experience is that most loans are between 2.0% and 3.5% over LIBOR (London Inter-Bank Offered Rate) which is lower than bank prime rates.  Quite often our clients will request that we convert other debt into the sources we introduce.

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How do I know I'm getting a fair price for my company?

The value of the company is determined by an independent appraisal, which uses the standard criteria for determining market value.  Financial Exit Planning, Inc. will use your estimated value or an appraised valuation in determining the feasibility of an ESOP.  If an appraisal is required, we will refer you to a number of independent companies that provide this service. 

We do not provide appraisal services.  We are concerned that this could become a conflict of interest in some transactions.

There are plenty of companies that will offer to do it all for you.  These firms are usually more interested making money from reports, studies, appraisals and other consultancy fees rather than doing the actual financing.

Our goal is to get you the money by executing a 'win-win' exit plan giving you the peace of mind that you received a fair price for your equity and that your people have a company with a future.

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Is an ESOP a permanent thing ?

No.  If you are concerned that you may be stuck with an unwanted ESOP in the future, a company may wind-down its ESOP by simply discontinuing contributions and buying back the company stock as employees leave.  You can also end the ESOP immediately by fully vesting all participants and repurchasing the stock.

Conversely, if you worry that the ESOP may be legislated away, Congress enacted ESOP legislation to encourage broader ownership of capital.  ESOP provisions offer benefits to business owners but they also protect workers from company liquidations, provide them retirement benefits and encourage productivity.

There are a few ESOP scams designed for Tax Avoidance.  The IRS will catch these.  Our advice --- don't do it!

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How do I get my employees to understand an ESOP?

Your employees may need a little education to become interested in an ESOP.  We will explain to them how they will retire with more resources and benefit from the increased value their productivity brings to the business.

If your employees are not interested in an ESOP, it is probably because the concept has not been properly communicated to them.  Most of your employees will grasp basic ESOP concept quickly and bring the remainder of your work force up to speed.  We can also provide follow-on meetings if needed.

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