Employee Stock Ownership Plans

ESOPs for Businesses: An Overview

Any company considering an Employee Stock Ownership Plan has numerous options for tailoring a plan to its own goals and situation. A large public corporation usually takes a different route to ESOP creation than a smaller private business does. The guide below outlines the general steps a company may take when designing an ESOP and implementing it.

Shaping Your ESOP

Once you have a general sense of the ESOP you want, a qualified consultant works alongside you to define the plan's details. First, the practical feasibility of the ESOP must be confirmed, and many questions need answers specific to your circumstances:

• Which employees will take part in the plan?
• How will shares be allocated among participants?
• What vesting schedule will apply, and how will distributions from ESOP accounts be managed?
• How will voting rights be handled?

The ESOP Association can provide the names of qualified consultants nationwide. Your consultant will align the ESOP's objectives with applicable laws and regulations and perform a financial analysis to confirm that the obligations the ESOP creates remain within the company's capacity to meet them. The consultant may also surface options you had not previously considered and may involve additional professionals, such as an appraiser or a lending institution, when appropriate.

Extra Steps for Privately Held Companies

For a privately held company, the feasibility and design stage typically is not complete until three additional matters are settled.

Independent Stock Valuation

First, an independent appraiser must value the company's stock before any shares are placed in the ESOP. A careful estimate is initially prepared as a working figure for the feasibility and design process. This preliminary appraisal often takes several weeks or more, since a substantial amount of business data must be gathered and reviewed. A final, formal valuation report is prepared only after the design process is complete and ready for implementation.

For more reading on valuing ESOP stock, see the Publications and Products section, including Issue Brief #8, "The Valuation of ESOP Stock," along with "An Introduction to ESOP Valuations," "Valuing ESOP Shares," and the "Report on Valuation Considerations for leveraged ESOPs."

Effect on Existing Stockholders

Second, the ESOP's impact on current stockholders should be estimated. Stockholders will want to understand how the ESOP may affect the value of their shares and the company's financial condition. An ESOP often leads to dilution of their equity interest in the corporation.

Contact Us

Get in touch with The McClure Firm to talk about how an ESOP may align with your business goals.

About The McClure Firm

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