What is an employee stock ownership plan (ESOP)?
An employee stock ownership plan (ESOP) is a unique strategy for business owners seeking liquidity. Using an ESOP strategy allows the business owner to sell a fractional amount or the entire business to the employees. Eligible employees will be allocated common stock over a period of time on a non-discriminatory basis. ESOPs are typically funded and sponsored by the company. In other words, the employees pay nothing for the shares other than time and dedication to the company.
Learn more about ESOPs by watching this video
What are the benefits of an ESOP?
An ESOP could be a good fit for an organization if the organization has a strong desire to remain independent, a strong management team, and a solid operating and profit model. Some additional benefits for transitioning to an ESOP are:
- Significant tax incentives
- Flexible financing arrangements
- Continuity of corporate culture & company legacy
- Employee retention and attraction
How do ESOPs work?
At a high level, a business owner will work with an ESOP Trust to negotiate the transition of stock. Typically, this transition is funded through a combination of senior bank financing and seller financing. Over time, cash flows from the company are used to pay the transaction financing through the use of retirement contributions to the trust or through shareholder distributions.
As the ESOP trust repays the transaction debt, ESOP participants (eligible company employees), receive an allocation of stock based on wages to their account within the ESOP. Wealth creation is then achieved through the growth of the company’s stock value and additional stock valuations over time.