Is an ESOP the Right Succession Plan for You?

While we all look forward to retirement (or at least most of us), we don’t like to think about leaving our businesses. Dealer owners invest a lot of time, money, sweat and sometimes tears into their dealerships. Letting that go is hard, but if you have a legacy plan in place, then it will make it easier.

An Employee Stock Ownership Plan is a great exit strategy. It allows you to pass on your business to employees who are both financially and emotionally invested in it. Allowing them to share in the capitalism motivates employees to be successful, makes them more productive and creates a sense of community within your business.

Between 1974 and 2014, the average worker received $134,000 in wealth from company stock. In 2017, employee owners aged 28-34 had 92% higher median wealth and 33% higher income from wages than those who weren’t owners.

For employees, buying in is a no-brainer, but what about your benefits?  Well to start, you won’t be searching for new employees all the time considering people who take part in an ESOP have a 53% longer median job tenure than those who don’t. If employees are motivated to do better, then your company’s overall performance will improve, meaning more money in your pocket. It takes away the “I just work here” mindset and replaces it with an ownership mentality.

Something else to consider is that ESOPs are a qualified retirement plan and have some tax benefits. They’re similar to profit-sharing and 401k plans, meaning if you’re set up as an S-Corp, the ESOP trust isn’t taxed as income at the federal level or in most states. Plus if you take out a loan to fund the trust, principal payments are a tax-deductible expense.

So how do you set this up? Typically companies set up trusts.The amount needed in the trust is based on the valuation of your dealership. (And before you ask, no, you don’t have to put 100% of the company in the ESOP.) Then you must also decide if the stock will be leveraged (purchased with a bank loan) or non-leveraged (the company contributes cash or stock to the ESOP).

Some companies offer ownership to all employees, while others reserve it for management or other tenured employees. You can also give stocks to employees or require them to purchase the stocks. Then when an employee leaves the company or retires, the trust buys back the stocks at the current fair market value of the dealership.

When you need to know the valuation of your dealership, you hire a service, like GW Marketing Services, to appraise the business. We can also help to walk you through the entire set up process as a trusted consultant. We are happy to apply our more than 40 years of experience to your unique situation to help you set up the best ESOP for your dealership.

With a succession plan in place, you will be able to rest easy, knowing that your legacy is in good hands.