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How an ESOP Works
From share acquisition to allocation to repurchase, learn the mechanics behind employee stock ownership plans.
Download our Step-by-Step Guide.
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
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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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Whether you're considering an ESOP formation or weighing your liquidity options, we can help.