What is the win for the company?
There is an increased probability of management continuity, significant cash flows available to finance the transaction through tax and other savings, and research shows that ESOP companies are more profitable than comparable non-ESOP companies.
Because the balances in employees’ ESOP accounts are primarily invested in the stock of the sponsoring employer, participating employees become beneficial owners of the company. If the company’s value increases, participating employees stand to directly gain through the resulting growth of their ESOP accounts. The more substantial an ownership stake the ESOP provides employees, the more motivated they may be to improve company performance.
What is the win for the employees?
ESOPs offer employees retirement benefits and an ownership stake in the company for which they work. Additionally, an ESOP rewards employees who have promoted the employer’s success, and it can be structured to allow management to have effective control of the company, and possibly actual control over time, without risking their own capital. Also, tax savings significantly increase the long-term value of the stock.
What is the win for the selling shareholder?
ESOPs also offer a ready market to shareholders even in those cases in which a non-ESOP buyer may not exist at the time or when the owner only wishes to sell a portion of his or her stock. ESOPs can pay up to the fair market value of the shares, as determined by a qualified independent appraiser. For some industries, it can be difficult to get a fair price for the company based on its financial performance. An ESOP can help unlock this value for the selling shareholder(s). Thus, ESOPs give owners maximum flexibility over the size of the transaction, the timing of the sale and the price of the shares.
When selling to an ESOP, the selling shareholder(s) can preserve the company’s legacy and, with proper structuring, the selling shareholder(s) can retain effective control of the company even if the ESOP holds a majority of the stock.
Why have you not heard about ESOPs before from your advisers?
To achieve any or all of these benefits, companies and selling shareholders must carefully structure the ESOP transaction. After the transaction, the company must make sure that the ongoing operation of the ESOP adheres to the requirements of the Internal Revenue Code and the Employee Retirement Income Security Act of 1974 (ERISA).
The challenge is that many tax and other business advisers don’t have the ESOP experience needed to properly advise companies through the requirements. It is important to have experienced professionals guide you through an ESOP alternative.
Under U.S. Treasury rules issued in 2005, we must inform you that any advice in this communication to you was not intended or written to be used, and cannot be used, to avoid any government penalties that may be imposed on a taxpayer.
Hugh Reynolds is a partner with Crowe Horwath LLP. Reach him at (954) 202-8616 or [email protected].
