The average age of small-business owners has risen steadily in recent years. As retirement age approaches, many seek advice on how to transfer their business to the next generation.

One option worth considering is an Employee Stock Ownership Plan (ESOP). With this option, you can reward the employees who have helped you grow your company to what it is today -- and provide them an incentive to keep the business strong as they carry on your legacy.

There are more than 11,000 ESOP companies in the United States. To determine whether your company should join their ranks, a number of financial and cultural factors should be considered. Here’s a short list of preconditions that favor the ESOP option.

• The owner plans to retire in the next 5 to 10 years.
• The owner has a desire to reward loyal employees.
• No close family members have an interest in managing the company.
• No third-party buyer for the company is readily available.
• The company is mature, and capital expenditure needs are modest.
• The company’s management team is competent, engaged, and forward-thinking.
• The balance sheet is strong enough to absorb ESOP debt.
• The company generates sufficient cash flow to service debt.
• The value of the company is increasing.

In addition to smoothing the transition, the ESOP alternative can provide tax advantages not available with a third-party sale. For C corporations, the sales proceeds may be tax deferred -- and all companies can deduct future debt payment from their taxes.

In a recent survey conducted by the ESOP Association, 88 percent of the responding companies said that creating employee ownership through an ESOP was “a good decision that helped the company.” A successful ESOP requires a commitment by the owner and the management group to provide meaningful benefits to employees. Upon implementation of the ESOP, quality communications and education programs are critical to keeping employees involved and motivated.

To discuss ESOPs and other ownership transition options, please contact your nearest Wipfli office.