Most business owners are guilty of violating an important rule of investing — never have all your eggs in one basket. After years of pouring their hearts and money into their company, entrepreneurs typically find that the majority of their family’s net worth is in their own business.
While investing one’s life and money into a business can lead to great wealth if successful, there comes a time to diversify holdings and limit downside risk. Many entrepreneurs don’t consider the implications of having most of their wealth in one stock — their company — until it is time to retire or transition leadership to the next generation.
Selling the business is always an option, but there are many issues to address such as finding the right buyer, market conditions, pricing, financing, taxes, transition time, disruption to operations, etc.
Selling the business predominately means selling controlling interest, which may be acceptable if the seller is ready to walk away at some point in the near future. However, many business owners want to maintain control of the company, but sell only a minority portion of the stock to diversify their personal assets. Perhaps business owners want to transition the company to their children or the key managers that have dutifully served the company for years. For business owners in this camp, selling control of the company is not an option.
For business owners looking for an alternative to selling the business to an outside party, an employee stock option plan, or ESOP, may be an ideal solution. An ESOP is a qualified employee retirement plan that allows the business owner to sell stock to the company’s employees. ESOPs offer significant tax advantages to the business owner and the company, and are a great way to motivate and reward current employees.