ESOP

Designing an ESOP Around Your Company's Goals

Any company weighing an Employee Stock Ownership Plan (ESOP) can tailor the plan to its own goals and situation. A big publicly traded corporation usually takes a different path to ESOP creation than a smaller private business does. The guide below lays out a general roadmap for designing an ESOP and putting it into practice.

Moving From Broad Vision to Detailed Design

After you have a general idea of the ESOP you want, a qualified consultant can help you nail down the details. The first priority is confirming that an ESOP is truly feasible for your company, which means answering a set of tailored questions:

• 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 connect you with consultants nationwide. Your consultant will align the plan's goals with applicable laws and regulations and run a financial analysis to confirm that the obligations the ESOP creates stay within the company's ability to meet them. The consultant may also surface options you had not previously considered and can bring in additional professionals, such as an appraiser or a lending institution, when needed.

Additional Steps for Privately Held Companies

For a privately held business, the feasibility and design stage usually is not complete until three further matters are resolved. First, an independent appraiser must value the company's stock before any shares are placed in the ESOP. A careful estimate is prepared early on to serve as a working figure during feasibility and design; this initial appraisal often takes several weeks or more because substantial business data must be gathered and analyzed. A final, formal valuation report is prepared only after the design is complete and ready for implementation.

Second, the ESOP's impact on existing stockholders should be assessed. Stockholders will want to understand how the plan affects the value of their shares and the company's financial condition, since an ESOP often dilutes their equity interest in the corporation.

For deeper reading on valuing ESOP stock, explore the publications and products covering Issue Brief #8, “The Valuation of ESOP Stock,” “An Introduction to ESOP Valuations,” “Valuing ESOP Shares,” and the “Report on Valuation Considerations for leveraged ESOPs.”