A company with an ESOP can acquire another business with tax-deductible dollars. Here are the key factors:

• First, locate a business that you wish to buy.
• That target business forms an ESOP so that its owner(s) gets Fair Market Value for 100% of the shares. (See Establishing)
• Your ESOP buys the target’s ESOP on a tax-free exchange basis.
• Tax-deductible contributions are made to the ESOP to pay off the target’s owners and the purchase of the target company through your existing ESOP.

Expansion Capital
Here is another great use for an ESOP. If the corporation needs expansion capital, it can issue new shares of corporate stock to the ESOP Trust, and after the company has borrowed the funds from its bank, it loans it to the Trust. In a hypothetical example, the Trust pays the corporation the $1 Million (or whatever dollar amount is borrowed) for its newly acquired shares. The company now has the additional capital in its bank account that it needed for expansion. Most important, the company’s debt service comes from pretax dollars (unlike regular loan repayments) and the IRS has helped finance the expansion.

Please note: In our hypothetical expansion capital example, if $1 Million was borrowed from the corporation’s bank at 8.5% for 3 years, the repayment total would be $1,136,433 (including interest amortized over the 36-month period). With a corporate tax rate of 40%, the tax savings would be a total of $454,573 (including both principal and interest).

From “The ESOP Alternative” Published 2003, by Matt Donnelly

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