ESOP

An Employee Stock Ownership Plan (ESOP) is an employee benefit plan that gives workers ownership interest in the company.

ESOPs give the sponsoring company (the selling shareholder) and participants various tax benefits. It is imperative that the ESOP adhere to the rigid procedures to ensure they maintain tax preferential treatment, etc.

Valuations are central to the employee ownership process. When a company initially explores an ESOP, its fair market valuation can inform plan feasibility, structuring, and financing considerations. And once a plan is in place, annual valuations dictate the pricing of an employee’s allocated shares.

The Key Players in an ESOP

  • ESOP Trustee - The primary representative of an employee trust, a trustee acts as the shareholder of record and has a fiduciary obligation to all plan participants. Trustees make sure that plan sponsors follow and execute the terms of an ESOP plan document, while receiving input from their legal and financial advisors.

  • Independent Appraiser - Retained by the ESOP trustee, this professional helps establish a fair market valuation of the plan sponsor and pricing for ESOP-owned shares. ESOPs must be appraised by an independent, outside appraiser at least annually.

  • US Department of Labor - The DOL provides federal oversight of all ESOPs in accordance with ERISA. In addition to regulating plan procedures and reviewing the activities of plan professionals, the department verifies that ESOP sale and subsequent valuations reflect fair market value.

What are the Advantages of an ESOP?

  • ESOPs are a long-term benefit for employees

  • ESOPs foster an ownership mentality

  • ESOPs offer serious tax and investment benefits

  • Compared to an external sale, ESOPs can take less time to implement

  • ESOPs allow for both instant and gradual ownership transition

What are the Disadvantages of an ESOP?

  • Current shareholders may not maximize proceeds from a sale to an ESOP

  • Companies require strong management to succeed

  • ESOPs require ongoing administration and independent valuations

  • ESOPs are not ideal for startups or very small businesses