Founders Can Cash Out Without Selling Their Company
Business owners with wealth tied up in their companies are exploring employee stock ownership plans (ESOPs) as an alternative to a full sale. This structure allows founders to realize cash while retaining operational control.
Many founders find themselves in a bind when nearly all their net worth is tied up in their business. While the default advice is often to sell the entire company, veteran business coach Bruce Eckfeldt highlights an alternative strategy.
An Employee Stock Ownership Plan (ESOP) offers a way for founders to extract cash from their business while continuing to lead it. This option is frequently overlooked or misunderstood, and Eckfeldt suggests it should be considered much earlier in a company's life than is typical.
An ESOP differs from a traditional sale to an external buyer. It involves a trust purchasing stock on behalf of employees. Founders can sell part or all of their stake in stages over time, and unlike strategic buyers or private equity firms, an ESOP may not require controlling interest.
The lack of traditional sell-side fees and the absence of a complete ownership transfer may mean that ESOPs are less frequently proposed by financial advisors and bankers, as their incentives differ from those in a standard sale.
Tax benefits, such as deferring capital gains tax for selling shareholders, are often linked to the ESOP owning at least 30 percent of the company post-sale, a rule applying to C corporations. S corporations may benefit from ESOP income being exempt from federal tax, though founders typically cannot secure both advantages simultaneously, making the choice dependent on specific financial analysis.