Wealth Management Services
520-360-8177

Tax Exit Solutions

Tax Exit Solutions

Doug McClure, CEO of Global Investment Strategies, offered a simple observation about the role of Life Insurance products within a business.

“Nothing operates in a vacuum. Life Insurance products are a critical part of any company’s financial planning and asset management strategies. However, the strength of these products is either amplified or diminished by the overall strength of the business and their plans.”

For these reasons, we offer several business services that deal with the more holistic aspects of business success. Included are:

Business Review Services

This service provides a detailed review of the type and structure of the business. It provides an analysis revolving around operations of the business as it relates to the value that can be expected for liquidity purposes in a buy out or succession plan.

Funding Sources For Buyout

If funding is needed to pay the business owner for transfer, our banking sources can provide the liquidity to the new owner.

Succession Planning

Planning providing a path and value transfer of the business to family, key group of employees, or outside persons or entities.

Business Evaluation Services

Analysis services providing a value of a owners business for purposes of buy sell or succession planning. This independent service provides business value based upon the 5 most commonly used metrics.

ESOP (Employee Stock Ownership Plan)

An ESOP (Employee Stock Ownership Plan) is a unique vehicle for owners to fully or partially exit their business and employees to control their own retirement. An ESOP establishes an employee-owned company and offers a flexible, tax-favorable way to exit the business, provide retirement benefits and retain and motivate employees. Doug McClure, CEO of Global Investment Strategies, works closely with many owners and ESOP companies, helping them with their strategies and plans for setting up and sustaining their ESOP. As Doug explained it, for owners an ESOP is an attractive exit strategy for several reasons.

  • The development of an ESOP creates an immediate market for the owner’s stock, and a buyer for the owner’s business.
  • An ESOP locks in the value of the stock sold at the sale price, eliminating future valuation reductions due to ever changing business and regulatory factors.
  • The owner can transition the business to the employees over time if desired, thus staying actively involved in the high level strategic decisions of the business.
  • There is no need to sell to a competitor or other third party, avoiding the sharing of confidential information.
  • An ESOP provides a business continuation strategy, keeping the brand name developed over years alive and well. This legacy of the business carries on with the team of employees that are in place and motivated as the new owners of the company.
  • A tax advantage with a leveraged ESOP is that both the loan interest and principal are tax deductible. This tax advantage can greatly increase operational cash flow.
  • For the family business, an ESOP can be an excellent tax beneficial succession planning tool to the next generation and key employees.
  • Dividends paid on the ESOP stock passed through to employees are tax deductible, which increases cash flow availability.

It’s plain to see why an ESOP is so attractive for privately held businesses. But, there are pitfalls along the way. To guard against these pitfalls, Doug McClure emphasized the versatility and importance of a well planned life insurance strategy as part of the overall ESOP strategy. Specifically:

Key Person Protection

The death of an individual critical to the company’s success can place a big financial burden on an ESOP owned company. Life insurance on that person provides peace of mind by assuring resources to meet creditor demands.

Loan protection

Life insurance owned by the business can be collateral to secure a loan, with an assignment to the lender that some or all of the death benefits will be used toward the loan.

Buy-Sell planning

With multiple owners, life insurance in the event of total departure, death or disability can make sure funding is available for the continued growth and stability of the company. Specifically in case of death, the Life insurance is used to purchase the stock from the estate of the departed employee providing the family money in their time of need.

Repurchase liability

An ESOP is a retirement plan for employees, and they will eventually retire (or depart, or unexpectedly die). Life insurance is a solution for accumulating the funds needed to cover these retirement expenses when they occur.

Income and estate tax planning

An ESOP is also an exit strategy for the owner. There are capital gains considerations for the owner when they sell their stock to the ESOP. Life insurance held in an irrevocable trust can help with these estate tax issues.

The Bottom Line – An ESOP benefits all parties. Current owners protect the legacy of what they built and have a solid exit strategy. The company’s cash flow improves, productivity improves, and attracting quality new hires improves. Employees are motivated to sustain this and secure their own retirement. LIfe insurance helps ensure that all of these benefits are realized.

Have a Question?

We have an answer. Don’t hesitate and call us on 520-360-8177.