If you’re starting to think about selling your small business to enable retirement, you may want to consider an employee stock ownership plan.

Why 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 an Employee Stock Ownership Plan (ESOP)

A strategy that can be worth exploring involves selling all or part of your business to an Employee Stock Ownership Plan (ESOP). When establishing an ESOP, you must comply with a number of technical requirements and may incur 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.

Working With Janney

Depending on your financial needs and personal preferences, you may opt to engage in a brokerage relationship, an advisory relationship or a combination of both. Each time you open an account, we will make recommendations on which type of relationship is in your best interest based on the information you provide when you complete or update your client profile.

When you engage in an advisory relationship, you will pay an asset-based fee which encompasses, among other things, a defined investment strategy, ongoing monitoring, and performance reporting. Your Financial Advisor will serve in a fiduciary capacity for your advisory accounts.

For more information about Janney, please see Janney’s Relationship Summary (Form CRS) on www.janney.com/crs which details all material facts about the scope and terms of our relationship with you and any potential conflicts of interest.

By establishing a relationship with a Janney Financial Advisor, we can build a tailored financial plan and make recommendations about solutions that are aligned with your best interest and unique needs, goals, and preferences.

Contact us today to discuss how we can put a plan in place designed to help you reach your financial goals.

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)


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.

About the author

Jay Guyer

Vice President, Senior Financial Planner

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For more information about Janney, please see Janney’s Relationship Summary (Form CRS) on www.janney.com/crs which details all material facts about the scope and terms of our relationship with you and any potential conflicts of interest.

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