Would you sell your family business if it meant you'd pay no capital gains tax whatsoever? If this sounds interesting, you've got to join us for this edition of the Inside B.S. Show. Hey now, it's Dave Lorenzo, I'm the godfather of growth, it's show 795, and today we're talking about a way you can sell your family business and pay no capital gains tax. Does it sound too good to be true? Well it's not.

This is called an ESOP, and this is an employee stock ownership plan. It's a way for you to sell your business without having to pay any capital gains tax. Now, I'm not a tax expert, and I'm not a lawyer, so I'm not giving you accounting advice or legal advice here, but what I am telling you is, if you're thinking about how you're going to exit your family business, even if that exit is 10 to 20 years on the horizon, I want you to think about an ESOP.

Here's why. I got a call yesterday, I posted an article, I wrote an article about this on LinkedIn, and the headline for the article was, would you sell your family business if you could pay almost no capital gains tax, reward your employees, and preserve your legacy? So I didn't expect anything to come of this article. I posted it because I wanted to educate the people who are my followers on an ESOP.

There's a lot of myths about ESOPs out there. Most people don't really think about them, and you have to be at a certain level of business in order to have an ESOP or use an ESOP. So I post this, and I get a call from a guy who knows me, and he says, listen, I didn't think an ESOP was in my future, but based on what you said, I think it might make sense to consider it.

This person has a business that's doing $7 million in annual revenue, and he's got 35-ish employees. Really, an ESOP makes the most sense if you're doing $10 million in annual revenue or more, you have stable cash flow, and little or moderate at most debt. You have a business that can operate without you.

You have a saleable business, and you have at least 50 people or more. Now family businesses are particularly good for ESOPs because if you sell to the ESOP, it will protect your legacy. Now ESOPs are, there's five real big advantages.

First, you have a built-in buyer. You can sell 25%, 35%, or any percentage you want to the ESOP, and then the ESOP is essentially a trust fund, and it can buy the rest of your business at any time. So if you want to get out in six months, you can sell to the ESOP and get out in six months.

You get the cash from that portion of the sale when the sale closes. You're selling to a trust that's managed by a trustee. The trustee's interests and your interests are aligned, so keeping the legacy of the family business is in the best interest of the trustee.

You exit whenever you want. You get enormous capital gains savings. So if you're a C corporation, and you should be if you're at that size, you sell 30% or more to an ESOP.

You can defer capital gains under Section 1042 of the IRS Code, the Internal Revenue Code. 100% of an ESOP-owned S corporation pays no federal income tax on its profits. Now, you got to check with your accountant, you got to check with a tax lawyer, but there are ways to set it up so that you can pay no capital gains tax.

You will get employee engagement like you've never seen before because your employees will own a portion of the company through the trust. So 30% of your business or whatever you sell to the ESOP will become owned by the employees, and ESOP contributions are tax deductible. This is a phenomenal vehicle if you are doing enough in revenue to support the organizing costs, the setup costs, and the ongoing administrative fees.

The biggest benefit I see for family business owners is if there's no clear successor in the family, so you got kids and there's nobody who you can see on the horizon for the next 10 to 15 years that's going to take the business over. You can sell 30% of your business or a third, 33% or 40% of your business to the ESOP. Keep the 60, 70% of the business in your control.

Then if one of the kids rises to the top, if one of them is Michael and not Fredo, then you can have that kid take control of the 70% if the business continues to grow, the value that they receive will still be greater. You've taken some chips off the table with the 30 or 40% of the business that you've already sold to the ESOP, those chips that you've taken off the table, if you've set it up correctly, you're not paying capital gains tax on them, you can invest them wisely. Everybody wins.

The legacy is protected because the ESOP owns 30 to 40% and it's in their best interest to continue with the family business. I mean, this is a good vehicle. Now you're thinking to yourself, okay, so Dave, the ESOP is a good vehicle.

It sounds too good to be true. What's the downside? It's expensive. That's the downside.

Setting it up in the beginning is expensive. You got to fund the trust there, so your business has to be stable. There is a trustee that you're going to have to deal with, but their interests and your interests are aligned, so it's not really that big a deal.

But there are administrative fees every year that you're going to have to pay. Okay, so it's not complication free, but it's a small price to pay for a huge, huge upside. So here on the Inside BS Show, that's what happens when you record these things live.

Here on the Inside BS Show, we're going to spend some time every month dedicated to talking about exit strategies for family businesses that don't necessarily involve family members. Why? I want to share all the potential options with you. If you're interested in ESOPs, reach out to me.

We have several people we work with who are great at employing these ESOP strategies. Down in the show notes or down right below this video, I am going to link to an interview that Nicola and I did with Andrew Nicolai. He's an ESOP expert.

He is the guy to call for ESOP issues. I want you to explore an ESOP with him if you're doing over $10 million in annual revenue and you have over 50 employees. This is the Inside BS Show where we take you behind the scenes and give you the inside scoop on everything you need to know to run your business, your family business.

If you have questions, reach out to me. My phone number is down in the notes, down in the show notes below this show. I'm here for you all the time.

I'll be back tomorrow at 6 a.m. with another show. Until then, here's hoping you make a great living and live a great life.