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Michael Bannon
CSG PARTNERS
An employee ownership expert with a private equity background, Michael now works directly with business owners and their companies to build goal-oriented exit and transition strategies. A Managing Director with CSG Partners, he quarterbacks leveraged ESOP transactions for middle-market clients
Donna Caruso, CPA
WINDHAM BRANNON
Donna has expertise in various types of benefit plan audits and leads the Windham Brannon ESOP practice. She manages all aspects of audits and reviews across diverse industries, including construction, real estate, telecom, manufacturing and distribution, restaurants, franchisors, investment management, and professional services firms.
Nick Jevic
FIFTH THIRD BANK
Nick is the Managing Director for Fifth Third’s ESOP Finance Group. Nick’s career spans 40 years and includes commercial real estate, leveraged finance, mezzanine finance and private equity.
Bobby Vercoe, CPA, CCIFP
WINDHAM BRANNON
Bobby specializes in assurance services and employee benefit plans. He works closely with clients across industries—including construction, manufacturing and distribution, real estate and healthcare—to deliver timely, high-quality audits and guide them through new accounting standards and complex transactions.
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EMPLOYEE OWNERSHIP BASICS
Are there different types of ESOPs?
Yes. The two most common types are contributory and leveraged ESOPs. Contributory plan sponsors periodically issue new shares to an employee trust. Cash can also be contributed to a trust so that it may purchase company stock. In a leveraged plan, an employee trust borrows money to purchase an equity stake from a company sponsor.
Are partial sales permitted?
Yes. Also known as minority ESOP transactions, these strategies enable targeted shareholder exits and partial liquidity events. Sponsor companies maintain the freedom to entertain various transaction options while individual shareholders retain equity. Additional shares can be sold to a company's employee stock ownership trust at a later date.
What laws govern employee stock ownership plans?
The Employee Retirement Income Security Act of 1974 (ERISA) codified the modern ESOP, set plan standards, and gave the Department of Labor oversight jurisdiction. Subsequent, bipartisan legislation has both clarified regulations and expanded the set of tax incentives available to ESOP stakeholders.
HOW ESOPs WORK
How do employee stock ownership trusts buy company stock?
An employee trust acquires shares on behalf of ESOP participants. A trustee negotiates the purchase price based on an independent valuation. Employees do not pay out-of-pocket for stock. Instead, the sponsor company secures financing and repays those loans on the trust's behalf.
How are employee-owned shares allocated?
Eligible employees receive share allocations proportional to their annual W-2 wages. In a leveraged ESOP, stock is usually parceled-out over multiple years. Similar to 401(k) plans, there’s generally a three-to-six-year vesting period for allocated stock. The details are determined before the plan is formed and outlined in the ESOP plan document.
When and how can employee owners sell shares?
In general, when an ESOP participant retires or departs a sponsoring company, all their shares are sold back to the plan sponsor. Shares are priced at a current valuation, and the sale is orchestrated by the employee stock ownership trust. Plan participants can roll their proceeds into another qualified retirement plan.
ESOPs AS M&A ALTERNATIVES
How do ESOP sales differ from other transactions?
ESOPs offer privately-held companies continued independence, unique tax advantages, and employee benefits. Post-transaction oversight of an employee-owned business rests with the firm’s board of directors, and selling shareholders often maintain meaningful roles.
Are certain companies better suited for leveraged ESOPs?
Leveraged ESOPs are industry-agnostic, but private companies with taxable income and at least 10 employees are generally better candidates. Common use cases include family business ownership transitions, management buyouts, partner exits, and partial liquidity events for owners who want to stay with their companies.
How do selling shareholders receive cash at close?
Many third-party lenders, including major banks and funds, help finance leveraged ESOPs. These loans are secured by plan sponsors on behalf of their employee trusts. Senior debt, without personal guarantees, is commonly used to provide up-front cash to sellers. Seller notes are also a standard ESOP financing component.
TAX ADVANTAGES
What is a 1042 Rollover?
An ESOP-exclusive benefit, this tax-deferral strategy enables selling shareholders to defer and potentially eliminate capital gains burdens on their sale proceeds. To earn the benefit, a seller must reinvest their proceeds in Qualified Replacement Property within 12 months of their ESOP transaction date.
Can employee-owned companies earn tax incentives?
Yes. When shares are transferred to an employee stock ownership trust, sponsor companies may earn state and federal income tax deductions equal to the fair market value of that stock. In addition, 100% ESOP-owned S corporations can become income tax-free in perpetuity.
Are employee owners entitled to tax benefits?
ESOP participants can roll plan benefits into other tax-deferred retirement accounts, including 401(k)s and IRAs. Rollovers must be completed within 60 days of a plan distribution. Otherwise, distributions and dividends are subject to standard taxes and early withdrawal penalties.
