The 2017 “transaction season” is nearing the final countdown to midnight, December 31st. It’s the rare ESOP practitioner that would take on a new 2017 ESOP transaction this far into the “season.” But, don’t despair if you missed the 2017 window. Unless you had specific tax or other reasons why you really, really needed to get a transaction closed this year, you may be better off waiting until the first quarter of 2018. Why is that? Here are three very good reasons.
Choose Your Advisors Carefully.
Many moving parts have to work together to reach a successful ESOP transaction outcome. Putting together the right team of ESOP experts takes time – the company and sellers need an ESOP attorney or other qualified advisor to guide them through the process. But, communicating well with your advisors is almost as important as the advisors' skill levels. Take your time to find a good fit!
Once you've chosen your ESOP advisor, he or she will need to gather information, talk to the board, the sellers, your CPA and any of your other trusted advisors who will be integral to the ESOP going forward. Your ESOP attorney will also help your board interview and select a trustee and third-party administrator. This team-building process can be expedited, but can't be skipped.
A Rushed Transaction Is Not Ideal.
Proper ESOP design takes time. Designing a transaction structure that works for the company, the sellers, management, employees and the ESOP takes time. Proper transaction due diligence takes time. You get the picture – it takes time. Don’t get me wrong, we are 100% on board with designing and completing ESOP transactions quickly and efficiently. But, not at the expense of quality work. You want to wake up the morning after the deal closes with an ESOP and a transaction you can live with. And, you want it to be an ESOP transaction that the IRS and Department of Labor won't pick apart. So don’t rush it.
The good news is that all is not lost if you really want that ESOP contribution tax deduction for 2017. There is still time to design and adopt an ESOP by December 31st to preserve the deduction for the 2017 tax year. If you do, you'll be a step ahead when it comes time to sell stock to the ESOP in 2018.
Why Pay Tax Before You Have To?
Jamming a transaction in before the end of the year may feel like the right thing to do. It’s appealing to “start the year fresh” as an ESOP-owned company. But, again, unless you have some compelling tax or other reason, why not wait and close the transaction in the first quarter of 2018? If you wait just a few months longer, the tax bill won't come due until 2019. Plenty of time for a seller to do some well-thought-out tax planning.
And, because we could be on the cusp of some significant changes to the tax laws, you may want to re-evaluate your existing tax strategies in a couple of months, if and when things do change.
It can be tempting to squeeze an ESOP transaction into the last few weeks of 2017, but it's probably not a good idea. Better to take a breath, appreciate the complexities of ESOPs that make them such a flexible business transition tool, and dive into the process in January. Take advantage of your advisors' slow time of the year and get it done right!