ESOP: A Secret Weapon
for Financial Planning

ESOP: Secret Weapon for Financial Planning

ESOPs have become a popular way to attract and retain talent. ESOPs motivate employees by giving them a direct stake in the business. Research by Steven Freeman from the University of Pennsylvania confirms that on average there is increased productivity, longevity and profitability in firms that have adopted the ESOP in the past 30 years. However, most business owners or financial advisors are unaware that the ESOP can also be used as an effective financial and succession-planning tool for the owners of closely held businesses. Strategic use of ESOPs let owners realize as much as four times the value they think the business is worth -- and they can access that equity now, not just when they retire.

If your business is a business corporation ("Inc."), has employees and shows net income before tax, it is an ideal candidate for an ESOP. The ESOP uses annual contributions the company makes as tax-free employee compensation to buy up to 100 percent of the owner's stock. Typically the ESOP buys 49%, leaving you 51%, a controlling share. You can sell that 51% at retirement. The ESOP can borrow from a bank, using the annual contributions as payment on the loan ("amortization"). This gives you cash up front when you need it. The best part: you don't pay tax when you take this money -- only when you spend it.


Give employees a stake in the company
Motivate employees to be your "marketing department"
Let you access the equity in your business
Protect you from revenue volatility
Let you sell some or all of the business anytime you want
Why wait to enjoy the fruits of your hard work?

About Walter Wilson
Walter Wilson brings an entrepreneur's view to the law. He helps clients insulate their assets, lower their tax bills, and sell their businesses for up to four times what they could get by merely listing them

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