How an ESOP Works

From share acquisition to allocation to repurchase, learn the mechanics behind employee stock ownership plans.

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ESOPs are Defined Contribution Plans

As a result, there are concrete rules that govern plan development and ongoing management.

Join ESOP expert Larry Kaplan for a video walk-through on how employee stock ownership plans are function.

More Employee Ownership Essentials

Understand the key principles, advantages and potential downsides of employee ownership.



ESOP Valuation, Financing & Governance Explained


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.

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