A sale of your company can be an unsettling time and many questions will arise. Who are the buyers? Is my position stable? Will the culture I have grown accustomed to and love change? 

Try not to panic. A great opportunity could present itself. 

Employee Stock Ownership Plan (ESOP) is a common way small and midsized companies compensate their employees. As the name suggests, an ESOP plays an important role in structuring a company as it gives all employees a ‘piece of the pie’ and the ability to benefit financially from the company’s growth.  ESOP owned companies have a long track record of being employee centric, lower rates of layoffs, and fewer corporate changes. 

That being said, change always comes and employee-owned companies can be purchased by external buyers (competitors, private equity firms, etc.).  During the buy-selling transition period, ESOP participants have several possible outcomes, including:   

1. Integration into new ESOP

2. Cash Distribution

3. Cash Liquidation to IRA or new 401k Plan

For the purposes illustrating the possible outcomes detailed below, let’s say you work at and own shares in Company Alpha. One day, the CEO of Alpha announces that Company Zeta will be acquiring Alpha.

Outcome 1: Integration into new ESOP

You learn Zeta has an ESOP of their own and you are given the option to integrate your existing stock into Zeta’s plan.  Typically, as a business who is acquiring another company (Zeta acquiring Alpha), they are also growing, so you will now be a part-owner of the larger company (Zeta). The main benefits to you as an employee is you can continue to own stock in your employer and there are no tax implications An ESOP is administered by a fiduciary overseeing the process whose duty is to make sure your equity is not diluted during this transaction. 

What if my ESOP Is Terminated?

Company Alpha announces the sale to Company Zeta has triggered the termination of the ESOP.  Try not to panic as this is very common. Typically, most plans will have language dictating that all participants fully vest (if not already, you have 100% ownership of the balance) in the event of a sale.  This gives you the opportunity to decide how you want to receive these funds.  You can take a Cash Distribution, or you can choose to Roll Funds to an IRA or 401k.  Each option has benefits and drawbacks and both will require careful planning to maximize your future plans. 

Outcome 2: Cash Distribution

An ESOP is considered a qualified plan (similar to your 401k or IRA) and a cash distribution from the plan will be taxed.  This means, if you elect to take the full (or partial) cash distribution, you will owe income taxes and if you are under the age of 59 ½ an additional 10% penalty. For younger employees who want access to the funds now, or have a smaller balance in the plan, this might be a possible course of action as the tax impact would be minimal.  There are additional strategies that can be implemented to offset taxes as well.

Outcome 3: Cash Liquidation to IRA or new 401(k) Plan

For employees with larger balances, rolling funds into an IRA or 401k will generally make more financial sense. This is not a taxable event and allows the funds to continue to grow tax free. Plus, because your Company Alpha stock has been sold, the funds can be invested properly into a diversified investment portfolio. This option opens many more planning opportunities as you look towards an early retirement or other financial goals.

But doesn’t a 401(k) or IRA lock my money up until I am 60? 

Yes and no.  To take normal distributions from your IRA/401(k) you do need to reach 59 ½ to avoid a penalty.  However, having a large balance in your 401(k) plan presents new opportunities that a comprehensive financial plan can uncover.  For example, if Company Zeta has an established 401(k) plan that you elect to have your proceeds from sold Company Alpha stock, there is something called a 72t distribution or the Rule of 55.

The sale of your company can be unnerving, especially when you are invested (both emotionally and financially). There is not a one size fits all solution when deciphering your next move and the same is true when planning for your future finances. While there are endless resources that can be found online, a comprehensive financial plan tailored to your own goals can uncover opportunities. Westview Investment Advisors is a Vermont owned and operated financial planning and investment management firm serving clients in Vermont and throughout the country as they plan for their future.  Westview is a fiduciary, and it is our mission to help you achieve your own financial success.