(Dow Jones) With credit easing but the economy still weak, small-business owners looking to sell their stakes are turning more often to Employee Stock Ownership Plans.
Financial advisors say they are seeing a renewed interest in so-called ESOPs, particularly among those owners now approaching the age when they had hoped to sell and retire.
"We're seeing two to three times the number of transactions that we had last year," says Tim Cleary, vice president of retirement and investor services, Principal Financial Group. "There are more boomers looking to transition."
Principal has been hired to assist in more than 70 ESOPs so far this year, compared to 14 in 2009 and 24 in 2008. The total for 2010 should soar even higher, as the last quarter is typically the busiest for ESOP business.
There is growing awareness of the potential tax and estate planning advantages of the plans, as well as a sense that they can benefit long-term employees who helped the company grow.
At the same time, there's a recognition that the economy-and the market for mergers and acquisitions-may not improve any time soon.
"You can wait for the economy to get better, but you can't wait to get younger," says Corey Rosen, executive director of the National Center for Employee Ownership, a nonprofit membership and research organization.
When credit and confidence in the economy froze in 2008, business sales of any kind, including ESOPs, became extremely difficult. Also, many owners didn't want to accept the reduced sale value that the financial collapse meant for many businesses.
Banks are now lending more and owners are adjusting to potentially lower values. At the same time, the economic rebound, while tentative, has brought some confidence that businesses will remain profitable and be able to repay the notes many owners are providing to finance the deals.
A type of employee benefit plan, the ESOP is similar to profit sharing. The company's fair market value is independently appraised before an ESOP trust is set up. The company typically borrows money and loans it back to the ESOP, which uses the funds to purchase the retiring owner's stock. The company gives the lender a guarantee that it will make contributions to the ESOP, sufficient for the trust to service the debt.