Only one out of seven of these business owners plan to pass their businesses along to family. And nearly nine out of 10 have no exit strategy at all. With nearly 80 percent of their net worth tied to business ownership, these individuals need help converting some of those business assets into investable assets as they approach retirement.

With the expiration of the Bush-era tax cuts at the end of the year, capital gains taxes are set to increase from 15 percent – 20 percent in 2013, plus another 3.8 percent tax on capital gains from the new health care reform act. With some deductions going away and high capital gains rates in some states, the net effect could deplete as much as 30 percent of an owner's accumulated wealth in the business. The special tax advantages of ESOPs can help mitigate the tax hit and even help fund the sale of all or part of company. 

When appropriate, an ESOP can also help business owners:

• Unlock previously illiquid assets
• Gain greater diversification
• Develop an exit strategy when they're ready to retire

How the ESOP opportunity works

ESOPs are qualified defined contribution retirement plans that are primarily invested in company stock. The structure of an ESOP allows a business owner to control the timing and extent of his or her exit while maintaining control of the company.

ESOPs transform an illiquid asset (ownership of a privately held company) to a liquid asset (cash). That cash can then be invested in other vehicles such as mutual funds, insurance, stocks, bonds and other options.

Consider this example. The owner of a $20 million dollar company is looking forward to retiring, but most of his net worth is wrapped up in his business. Prior to retiring, he sells 40 percent of the business to an ESOP. As a result, he now has $8 million in investable assets to fund his retirement. That's a very comfortable nest egg for the business owner—and an $8 million opportunity for his financial professional.

Benefits to employees

ESOPs can be powerful tools to help employees prepare for retirement. According to the ESOP Association, the average account balance for ESOP participants is over $195,000, more than three times the amount of the average 401(k) balance of $60,329.

Generally, employees do not financially contribute to ESOPs, as the plans tend to be funded entirely by the company. For employees, the ESOP represents a return on their sweat equity—and a reason to stay with their current employer. 

Finding ESOP candidates

When prospecting for businesses that are a good fit for an ESOP, look for:

• Closely held organizations (often C or S Corps)
• Owners with large portions of their net worth in the value of the business
• One or more owners seeking diversification and/or nearing retirement
• A history of profitability and strong cash flows
• Owners who value employees

Even if you have limited or no experience with ESOPs, you can still take advantage of this opportunity by teaming with experienced ESOP consultants and taking advantage of online resources.