Small business succession planning is a major challenge and opportunity for community economic development. There are significant and some negative tax consequences following the death of an owner without a succession plan. The sale of existing businesses, even if successful, could result in relocation of the business, dissolution by competitors, or collapse under absentee owners. The lack of succession planning for small businesses is also a reflection of the lack of resources available for planning and a lack of attention to succession details which are typically delayed while dealing with the pressing matters of ongoing business at hand.
Through the use of a leveraged ESOP, a bank will lend funds to the ESOP which is guaranteed by the assets of the company. The ESOP uses the money to purchase shares from the company. The owner then transfers stock to the ESOP and the firm makes ESOP contributions monthly equal to the loan payments. A trustee is appointed to protect the interests of the employees while ensuring the firm is purchased at a reasonable amount. Prior to establishing an ESOP, the owner should enlist the services of a business valuation analyst to ensure a valid amount for the business.
The ESOP offers a means to heighten proper control of the firm, as well as transferring ownership. In an ESOP the workers voting rights for stock are passed through by the trustee to the workers who will instruct the trustee how to vote the shares that they hold before they have full control of the firm. The construction of ESOPs is dependent upon the willingness of both the workers and the owners to pursue such a path. Cooperation cannot be imposed upon either.
The various professional service providers would find it in their interest to educate small business owners about ESOPs. The ESOP would become one of the financial products employed by bankers, lawyers, accountants with their small business clients. Not only does the ESOP provide a way for these professionals to market services, ESOPs keep the firm as a long term client for the benefit of the provider as well as for the community.
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