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An ESOP could be an alternative exit strategy for business owners -- Denver Post

As business owners approach retirement age, many consider selling and often face difficult decisions related to the value of their enterprises.

While a business owner wants to receive fair-market value for the business, he or she may not want to sell to a third party. The owner may want to reward loyal employees who have made significant contributions to the success of the business, and for these owners, an employee stock ownership plan, or ESOP, may be a practical exit strategy.

What is an ESOP? It is a type of qualified retirement plan similar to a profit-sharing plan with one main difference. An ESOP is required by statute to invest primarily in shares of stock of the ESOP sponsor (the corporation selling the stock). Unlike other qualified retirement plans, ESOPs are specifically permitted to finance the purchase of employer stock by borrowing from the corporation, other lending sources or from the shareholders selling their stock.

When Congress authorized ESOPs in 1957, and defined their rules in 1974, it had two primary goals: to provide tax incentives as a vehicle for owners of privately held companies to sell; and to provide ownership opportunities and retirement assets for working-class Americans.

How does an ESOP work? The corporation’s board of directors adopts an ESOP plan and trust and appoints an independent ESOP trustee. An appraisal of the corporation’s equity is obtained. The trustee negotiates the purchase of all or a portion of the corporation’s issued and outstanding stock from one or more selling shareholders.

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