There are several advantages and disadvantages in deciding to implement an ESOP plan. They include the following and more which we can discuss at length when you are analyzing this option.
Advantages of implementing an ESOP plan to own the business go beyond the wealth that is generated from a transaction. The ongoing tax benefits, in the instance where a company is an S corporation, (ESOP owned S-corps are not subject to corporate tax), greatly enhance the ability of the business to pay down the ESOP debt post-transaction, and can give them an ongoing operating advantage over their fully-taxed competitors. In addition, when properly communicated, an ESOP should create an espirit de corps, meaning an enhanced sense of satisfaction and pride in the employees who now own part of the business. Studies have shown time and again that ESOP companies generally have lower turnover, higher productivity, and weather the storm better than their non-ESOP brethren.
Disadvantages of selling to an ESOP are also some of the reasons that a seller may choose, after careful consideration, not to do an ESOP transaction. They may include valuation and other issues. An ESOP must pay fair value for the shares; it will not pay a discounted price and it cannot get into a bidding war with an outside buyer. Also, if it is a leveraged transaction, that debt may create too much leverage for a business dependent upon leverage to grow or operate. It may not be feasible to take on the debt required to buy out the selling shareholder.ESOP 101 brochureDisclosures:This information has been prepared for informational purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. The accuracy and completeness of this information is not guaranteed and is subject to change. It is based on current tax information and legislation as of March 2022.Since each investor’s situation is unique you need to review your specific investment objectives, risk tolerance and liquidity needs with your financial professional(s) before a suitable investment strategy can be selected. Also, since Wells Fargo Advisors does not provide tax or legal advice, investors need to consult with their own tax and legal advisors before taking any action that may have tax or legal consequences.