Should I Consider an ESOP for My Dealership?

By Samuel J. Agresti, Jr., CPA

When preparing for retirement, an Employee Stock Ownership Plan (ESOP) may be a desirable option when planning the future of your dealership.

Transitioning ownership to an ESOP has risen in recent years with dealership owners. It is often not considered and there are misconceptions about it. Here’s what you need to know about ESOPs and the benefits they can provide for the legacy of your dealership.

First, let us discuss what an ESOP is.

As dealership owners begin to plan for their retirement, they usually consider options like passing the business to a family member, selling to an individual within the dealership, or selling to a third party. (We discussed these options in our Succession Planning article.)

ESOPs weren’t always popular with dealerships, but in recent years, they have gained traction amongst dealers preparing for retirement.

An employee stock ownership plan (ESOP) is a tax-qualified, deferred compensation benefit that enables employees to retain ownership of the company’s stock. To put it simply, an ESOP is an employee retirement plan, with some of the same regulations as other plans. This means that you can hand over your dealership to employees who will then have a greatly expanded financial and emotional stake in the dealership. Employees who are invested and participate in an ESOP will be motivated to contribute to the dealership’s success and, thus, more engaged in the dealership’s performance.

Some view this is an advantage versus selling their dealership to a third-party. The unknown may be too unsettling, and it’s understandable. An ESOP essentially converts your employees into owners, and you won’t have to relinquish the control of the dealership until you are ready to fully retire. This also allows for a longer, more stable transition plan helping to reduce turnover as well. It is a much softer landing, so to speak, than a full, hard turn to a new owner.

Benefits of an ESOP for your dealership

• Owners can sell some or all of a dealership to an ESOP. And, the dealer does not have to relinquish their ownership.
• Provides continuity of corporate culture and company legacy
• Provides retiring owners with an opportunity for divestment and liquidity.
• Contributions of stock are tax deductible.
• Employees pay no tax on the contributions to the ESOP.

Characteristics of a good ESOP Candidate

• Consistent cash flow
• Strong management team
• 20+ employees and a strong corporate culture
• Solid operating model
• Debt capacity

There are various factors that make a good ESOP candidate. Reviewing each can help you determine what is viable and what work may need to be done to ensure a smooth, effective transition. Those characteristics are a great starting point to determine whether you should consider setting up an ESOP. It also can help you update or improve in those areas before you are ready to focus on executing on your transition.

What is involved in setting up an ESOP?

Setting up an ESOP can be a complex process and often involves a team of advisors to guide you through the process. To begin the process, we recommend getting a feasibility study completed to ensure your dealership will have a high probability of being successful as an ESOP. We feel it is best to understand this early in the process to identify any obstacles from the beginning. A feasibility study will look at both the economical and organizational aspects of your dealership and usually take around 30 days to complete. The entire ESOP process will take approximately 6 to 9 months, depending on what manufacturers you will need to get approvals from.

I’ve worked alongside many dealership owners who express concern regarding the future of their dealership. An ESOP can provide you peace of mind regarding your dealership and can reward your dedicated employees in numerous ways. Although implementing an ESOP can be a complex process, our guidance in having been through this process multiple times will help navigate it effectively.