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When a business owner sells their company, they must pay capital gains tax on the sale. If you sell your firm to an ESOP, the government set it up, so that you can defer this tax indefinitely. (See Video) How? This can be achieved by reinvesting the proceeds of the sale into what is called Qualified Replacement Property (QRP).
QRP are US securities. These securities can be either equity or debt: common stock, preferred stock, or corporate bonds. Securities of privately held companies are also considered QRP.
Securities that do not qualify for QRP include: federal and local government bonds, mutual funds, bank CDs, REITs, ownership through means other than a security, and securities from the company that established the ESOP or any member of a controlled group with the ESOP sponsor
A trust is created to be the buyer, and it is called an Employee Stock Owership Trust. The employees are beneficiaries of the trust. An institutional trustee is hired by the employees to handle the trust, and ensure that the employees are treated fairly.
Who sets the price of the company?
The trustee described above, and the business owner(s) negotiate the price, based on independent valuations.
It is paid-off with pre-tax corporate cashflow,
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We invite you to call us with any questions you have or email us by filling out the form below. No question is too big or too small – whether you have a question about MBO Ventures or a question about ESOPs.