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Home Products & Services Ownership Strategies Business Succession ESOP

ESOP - Employee Share Ownership Plan

The Mercury Centre now has available an "ESOP Model" that can assist retiring small business owners to transition their businesses to their employees as part of a succession plan. 

The Mercury Centre is working with its associated company "Equity Plan Pty Ltd" to deliver this ESOP service.

It is important to first note with regard to this model, that an ESOP enables a business to be transitioned to its employees out of the future earnings of the business rather than the current savings of the employees.

As a vehicle for business succession or an employee buyout of an existing business, the ESOP approach involves the following steps. (Establishing an employee equity stake in a new venture of course, can be done from the very beginning).

1. ESOPs are a "horses for courses" approach. There are a number of things that would have to be considered about the circumstances of each business before proceeding. ESOPs are built to suit the business and the requirements of the owners - both new and exiting - and may in fact be a combination of various employee share plans and incentive schemes suitable to segments of the workforce. The size of the business and the numbers involved in the share plans also have an impact.

2. There are a couple of options for you to consider if you think that an ESOP might be the way to go for any of your business succession projects:

i) You can sell the business to the employees over 5 to 10 years where the ESOP is funded by employer contributions alone (a gradual buyout), or

ii) You can sell over 3 to 5 years if the plan is a leveraged ESOP where funds are borrowed to pay out the owner(s) at an early stage and the ESOP trust pays off the loan over time using employer contributions. (For this to occur, the business must have a good cash flow to service the debt).

3. Company contributions to ESOPs can be tax-deductible.  ESOP contributions can be exempt from fringe benefits tax. Employee shares acquired through an ESOP may benefit from the general 50% capital gains tax discount. An employee with a more than 20% interest may benefit from the small business tax concessions. For the exiting owner, capital gains discount and/or small business tax concessions may be available.

If you want to proceed further along these lines, there will be a point when you will need formal tax advice. Our associated company, Equity Plan Pty Ltd, has the qualified professionals who can provide this.

On questions of detail, plan design and ESOP technical matters, you will need to work with Equity Plan to progress these, if you choose this path for any of your projects.

If there are any projects where The Mercury Centre could possibly assist on ESOP based business succession, please contact Alan Greig at the address or phone number on our "Contacts" page. 

 

 

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