What are the main tax advantages in structuring an ESOP to both the company and the selling shareholder?
In the case of a buyout where debt is used, debt repayment is made using after-tax dollars. With an ESOP, principle payments are tax deductible to the company. This provides a decisive tax advantage, resulting in a savings of 35% to 40% of the overall transaction cost. On the selling shareholder side, two benefits are derived. First, financially, it is possible to defer taxes on the sale of the stock: a seller can elect a 1042 tax deferral if the company is a C Corporation and the transaction size is at least 30% of the outstanding securities. The second benefit comes in controlling the timing of exit. For the seller that does not want to exit immediately, as is often the case with a 3rd party sale, an ESOP provides a longer term exit strategy that the selling shareholder can dictate.
