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Branching Out

An employee stock ownership plan is more than just a great way to boost morale-it's also a cheap source of growth capital.

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This story appears in the April 2004 issue of Entrepreneur. Subscribe »

When direct marketing agency Creative Direct Response Inc. decided to expand its nonprofit fund-raising business, the Crofton, Maryland, firm began looking for a company to acquire. It found Jeremy Squire & Associates, an Oakton, Virginia, fund-raising company. Jeremy Squire, the firm's owner, wanted to sell but was concerned about his employees. So Creative Direct Response offered a buyout proposal that was not only financially attractive, but also a means to reward loyal employees.

The $5.5 million firm urged Squire to sell his company stock to his employees through an Employee Stock Ownership Plan, or ESOP. Creative Direct Response would pay Squire for the $3 million stock purchase, acquiring the company as a wholly owned subsidiary. Because Squire provided financing, he could collect interest that would normally go to a bank. And since his company was a C corporation, he could defer capital gains taxes by using proceeds from the sale to buy securities of U.S. companies, a permissible practice when a business sells at least 30 percent of its stock to its employees.

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