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The advantages of selling a business to employees

On Behalf of | Apr 22, 2019 | Buying & Selling Businesses |

There are several reasons a North Carolina business owner might want to transfer ownership of his or her business to the employees instead of selling to another buyer. Chief among these are tax breaks. By selling to employees, the business owner can defer capital gains tax as long as the proceeds are invested in stocks and bonds. This often results in a larger after-tax gain than selling to another buyer at a higher price.

The primary vehicle used to convey a transfer of ownership is an employee stock ownership plan, also known as an ESOP. The transfer begins with the owner selling shares to an ESOP trust that is used to hold the shares for the employees. The employees pay fair market value for the trust as determined by an independent appraiser and typically finance the purchase with a bank loan. In some cases, the owner loans the money to the employees and collects interest.

In addition to tax advantages, employee-owned companies typically have a lower turnover rate and better profitability. The loan default rate also tends to be lower. Another advantage to employee-owned companies is that they pay no corporate tax. This results in higher net profits and frees up cash that could be used to pay off corporate debt.

Buying or selling a business can be very profitable. However, due diligence is required in order to make sure there are no title defects and no undocumented liens against the assets. It’s critical to know exactly what is being bought or sold and what liabilities are included in the sale. Since this process tends to be quite complicated, it’s often a good idea to seek out the help of a law firm with experience in buying and selling businesses.