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In this day of troubled economic times, you may have reconsidered selling your business because of reduced revenues and profits, which equate to lower values. If you have a target price in mind, but are on the sidelines until your company recovers sufficiently to support your exit strategy goals, C Ross Hedges & Associates has a program that allows you to install an exit strategy now for a guaranteed future sale.
 The new strategy has emerged in the game of corporate finance as an attractive alternative to the traditional sale of a business to an individual entrepreneur or corporate buyer. Under certain conditions, many business owners are finding that selling their business to an Employee Stock Ownership Plan (ESOP) is the smartest way to sell the company. The ESOP is not a new strategy, having been implemented by Congress back in 1974. However, with traditional sources of buyers & money all but drying up, it is emerging as the premier corporate finance strategy, delivering more benefits than ever before thought possible.
The advantages of an ESOP have always been oriented towards tax savings, both for the exiting stockholder and the surviving company. However, few have realized how an ESOP could be used as an exit strategy planning tool, effectively grooming a business for a future cash sale, while preserving all the benefits of ownership. The following is a strategy that will give you a much-needed edge in the marketplace as work your way towards retirement.
This exciting strategy is known as the "Pre-Funded ESOP". Instead of selling stock to the ESOP now, an ESOP is created without a sale and tax-deductible contributions are made that accumulate over time until you are ready to sell your stock for cash. In essence, you are creating your own cash buyer for your future exit. By regularly contributing any amount of corporate profits that you can afford, you can wipe out your corporate tax liability on that portion. It's like having your very own tax sheltered savings account that is supplemented with the taxes that your business would normally have sent to the IRS. You have the freedom to invest these funds, typically in Certificates of Deposit, since this really is your retirement money that will eventually buy your stock.
Because you haven't yet sold your business, you still have the opportunity to grow it to the value that you thinks it really is worth. How much easier will that be without corporate taxes to pay? This strategy puts you in full control to decide when to sell and at what price to sell based on a future valuation of fair market value. When you finally come to the decision to sell your  stock to the ESOP, there is a nice pool of cash sitting there waiting to buy your stock. And because you are now receiving cash, you will also qualify for the Section 1042 tax deferment which is the most attractive feature of an ESOP. By reinvesting that cash into other qualified securities, you can defer the capital gains on the proceeds indefinitely. And it gets even better! If, because of tax-deductible contributions into this ESOP retirement account, a taxable loss has been created on your corporate tax return, you can even go back and recover corporate income taxes that you have paid in the last two years. How far would that strategy go towards insuring the health of your business?
REASONS TO INSTALL A PRE-FUNDED ESOP
- The value of your company has not yet been fully optimized - perhaps the economy has taken its toll on revenue and cash flows.
- Tax savings – you are able to pay the taxes to yourself instead of to the IRS.
- An exit from the business is anticipated within the next 5 years.
- You can fund the ESOP as future cash flow allows.
- You can create a tax-sheltered retirement fund.
- Through the ESOP, you create a ready cash-buyer for the business.
- The amount of ongoing funding and the timing of an exit are totally in your control.
- Provides you with an edge over your competition who are still paying taxes.
- The company will grow faster with little or no taxes to pay, allowing you to reach your target value faster and therefore retire sooner.
- Ability to eliminate the third-party financing when you decide to exit the company.
- No additional debt burden is placed on the company.
- The ESOP can purchase treasury stock from the company to provide growth capital at any time, giving you access to pre-tax cash in an emergency.
C Ross Hedges & Associates has partnered with a leader in the ESOP industry to offer a turn-key approach to the design and implementation of an ESOP for your company. Our services include the initial analysis, full due diligence, management of third party professionals and post closing orientation for your staff. Our fees are performance based and our goal is to work with you to maximize tax benefits for your business.
A Pre-Funded ESOP can be installed in as little as 30 days. By installing a Pre-Funded ESOP before the end of the year, you could very easily make the contributions necessary to protect your corporate tax liability. There's no reason to delay any further. Call today to capture the tax savings that an ESOP can provide while insuring that your retirement will be worry free and fiscally responsible.
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