Although businesses worldwide have faced incredible challenges thanks to the COVID-19 pandemic and its lingering effects, family businesses have been hit particularly hard. In a study by KPMG, 78% of family business owners say that the changes created by the pandemic have impacted them. Of those business owners, 83% say they have seen a decline in income.
To make matters worse, the threat of increasing capital gains and corporate gains taxes has created even more financial uncertainty.
All of these factors make business succession planning a critical element of your business's overall success strategy.
Family business owners need to know their options.
The survival and growth of a family business takes thoughtful, detailed planning. Succession planning can be a complex topic because founders typically want to protect what they have worked hard to build. This makes loosening the reins and planning for others to step in challenging.
This issue becomes even more apparent in the case of multigenerational businesses. Families that have passed down their legacies for generations are often reluctant to seek outside help, especially to delegate important responsibilities.
Still, only about a third of all family businesses are passed from the first generation to the second. This is often because the owner has not put the time and attention into developing a clear plan to transfer ownership and assets to younger family members.
Introducing the ESOP
For family business owners, an ESOP can be an effective solution for exit planning. Wealth managers can help clients safely and confidently complete the steps necessary to develop a solid, clear exit plan.
Typically, in an ESOP scenario, a private business sells a portion of its stock to an employee trust. The stock is subject to fair market valuation, and the business lines up financing on behalf of the ESOP.
The most significant advantages for selling shareholders are wealth diversification and liquidity. In some cases, shareholders can also defer or avoid capital gains taxation by reinvesting proceeds to other securities via a 1042 rollover.
Flexibility is another important benefit - shareholders may choose partial or full sales. This allows them to achieve greater wealth diversification while establishing a meaningful interest in the businesses they have supported.
Finally, an ESOP empowers business owners to create an employee-ownership culture while maintaining a “locally and independently owned” atmosphere. Both can help improve employee retention and performance and drive your organization's success for decades - or even generations - to come.
Want to know more about securing your business and financial legacy? Reach out to one of our professionals today.