Majority owner relinquishes control. Family members wish to stay on and lead the company
Many owners wish to retire and cash out. They often have grown children in the business. In this scenario, the owner:
1.Will sell some or all of their shares to the employees
2.Take a significant chunk of money off the table (tax deferred indefinitely),
- If a minority interest is sold to the ESOP, the remaining family members can still lead the company.
- If a majority interest is sold to the ESOP, the remaining family members can still lead the company, but the ESOP will now have control.
- The Trustee has formal control of the company at this point, but it is not their job to run the firm. The management team will still be running the firm.
3.To fund the sale, the company will
- Get a non-recourse loan from a bank,
- Will take back seller notes (an IOU to the ESOP).
4.The family members may also allow MBO to invest in the deal.
5.The majority owner, and possibly MBO, can receive warrants in return for receiving a low interest rate.
- The owner can sell these warrants to the family members
You should view this ESOP illustration. An owner of a large government contracting firm, transferred ownership to his grown children through an ESOP.
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