A business owner has three options to sell their company:

  1. Sell the firm to employees via an ESOP
  2. Sell the firm to Private Equity or
  3. Sell the firm to a competitor.  

This article will briefly explain why an ESOP could be a better option than selling to private equity!

ESOP vs Private Equity

1.     An owner, after tax, can earn more money selling to an ESOP than to Private Equity. This is why: An owner can sell their firm to an ESOP for fair market value. The ESOP cannot pay more money than fair market value. If a private equity firm pays the same amount of money, the ESOP has more value to the owner. Here’s why: the capital gains tax for the owner, when selling to an ESOP, can be deferred indefinitely.  If an owner sells to Private Equity, the owners are required to pay significant taxes. On average, you are talking about 30%. In order to be equal, the private equity firm would have to pay 30% more than fair market value.

2.     Only ESOPs receive government subsidies on loans. Both ESOPs and Private Equity use loans to purchase the company. Instead of paying taxes, Congress allows ESOPs to use this money to pay down the debt, while Private Equity receives zero subsidies from Congress.

3.     Companies structured as 100% ESOPs run completely tax free. Therefore, the corporate cash flow is double that of a private equity backed firm.

4.     Employees of ESOPS have incredible financial benefits. Besides maintaining their jobs, they earn more money than their private equity counterparts as part of the sale.  According to a Harvard University study, when private equity purchases a firm, statistically 4% – 13% of employees are fired as a result of management changes.

To learn more, go to www.mboventures.com or contact me, directly Darren Gleeman to learn more: dgleeman@mboventures.com

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