Most merger-and-acquisition transactions are done as an asset sale. If a business owner has a low tax basis in a company, every dollar above that basis is subject to ordinary income tax. And when federal, state and possibly local rates are combined, we're talking rates of 50 percent-plus. If the deal is done as a stock sale, the owner has to pay capital gains tax, which is climbing towards 40 percent in states like California and New York. Even in no-income-tax states like Florida, Nevada, and Texas, we're seeing more ESOP transactions.
Rutgers University has been following ESOPs from their early days. According to Rutgers' studies, the average productivity for an ESOP company versus a non-ESOP company is about 2.5 percent higher. Profitability is about 10 percent higher.
During the recent Great Recession, 12 percent of businesses in the U.S. laid off people. But only 1 percent or so of ESOP companies went through the same exercise. All told, it's a very positive track record.