Selling to Your Employees, Why and How

Job Preservation

If you don't have an obvious heir in your family to carry on ownership and management of our business, one good alternative is to sell it to your employees. This generally insures that your business continues as an independent company and preserves the jobs of your employees.

Tax Advantages

Furthermore, there's a tax break for you as the seller: Sell 30% or more of the stock in your company to your employees through either an Employee Stock Ownership Plan (ESOP) or an employee cooperative, and you have the option of sheltering the capital gains on the transaction from the capital gains tax. This is the "1042 Rollover" which we provide more information on through the links below as well as in our publication Selling Your Business to Your Employees: Employee Stock Ownership Plans (ESOPs) and Worker-Owned Cooperatives

Two Methods

There are two basic methods to sell to your employees. The most common is the ESOP. An ESOP is very flexible, tax-advantage tool in succession planning. I can be combined with other ownership succession strategies including majority family ownership or a management buyout. Less common but more useful in smaller businesses is the worker (employee) cooperative. Worker owned cooperatives are not as highly regulated they are less expensive than ESOPs to set up and maintain. Both allow for job preservation, company independence, and tax advantages.

Selling to an Employee Stock Ownership Plan (ESOP)

An ESOP is a qualified employee retirement plan. It differs from other qualified retirement plans in two ways: 1) it invests primarily in the stock of the employing company, and 2) it can borrow money. As qualified employee retirement plans ESOPs have tax advantages that make them the employee-ownership structure of preference in companies that are profitable, capital intensive, and employ more than 20-25 employees. An ESOP is also the preferred choice when employees will acquire less than all of the company's shares. For more information on selling to an ESOP click here.

Selling to an Employee Owned Cooperative

Worker cooperatives are part of the broad family off cooperative businesses which include farmers' cooperatives, like Sunkist, Welch's and Ocean Spray, rural electric cooperatives, consumer cooperatives like natural food stores, small business cooperatives like Ace Hardware, and financial cooperatives like credit union and mutual insurance companies. What all cooperatives have in common is that they are owned by the members and achieve economies of scale that their individual members could not achieve alone.

An employee owned cooperative is a corporation owned and controlled by its employees that jointly markets the products of services produced by its member-workers in the same way as a farmers' cooperative markets its members' production of grain or milk. Worker cooperatives have different and smaller tax advantages than ESOPs, but they are less expensive to set up and maintain. They are ideal employee ownership solution in smaller companies, if employees intend to acquire all of the company's stock over a period of years. For more information on selling to an employee owned cooperative click here