Let's Clear Up Some Common ESOP Misconceptions
Employee stock ownership plans are complex financial transactions. As a result, there's plenty of confusion surrounding these benefit-rich programs.
ESOP Valuations, Financing & Governance
Assessing Fair Market Value
The Internal Revenue Service defines FMV as the price a company would sell for on the open market. “It is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts.”
ESOP Multiples vs. Strategic Sales
An ESOP trustee has a fiduciary responsibility to pay fair market value for equity. If a strategic buyer believes the transaction offers unique synergistic benefits, that company may pay a premium that exceeds the FMV price. An ESOP’s tax advantages may help close or eliminate this gap.
Financing a Leveraged ESOP
Many commercial lenders are attracted to ESOPs. The associated tax incentives drive increased cash flow and employee-owned companies statistically outperform their peers. Senior debt, offered without personal guarantees, can often finance a sizable portion of a transaction.
A Trustee's Fiduciary Responsibility
ESOP trustees are obligated to pay fair market value for a company's equity, to manage the trust's assets, and to conduct annual, independent stock valuations. A trustee also maintains the trust in accordance with the ESOP's plan documents and votes the trust's shares.
Managing an Employee-Owned Company
If a company does not already have a board of directors in place, one will be established when an ESOP is formed. ESOP's trustee will have certain voting rights and take part in the election of a board's slate of members. The board maintains operational management of the company.