Employee Stock Ownership Plans (ESOP)
An Employee Stock Ownership Plan (ESOP) is a type of qualified retirement plan that provides employees an ownership interest in a company.
If you are a business owner, an ESOP can help you sell all or part of your company to your employees, creating an “employee-owned” company. Many business owners start an ESOP as a way to sell their company and eventually retire.
Here's how it works:
- The company forms a trust and establishes the retirement plan.
- The company obtains financing and lends the proceeds to the ESOP trust to buy out all or a portion of the owner(s) shares (optional).
- The company makes contributions to the trust annually.
- The trust uses the contributions to repay the loan.
- As the trust repays the loan to the company, shares are allocated to the employee accounts.
- When an employee leaves or retires, they typically redeem their shares for cash.
ESOPs can provide a variety of benefits to you, your company and your employees:
- You gain access to illiquid assets that are tied up in the business.
- You can generally continue to work for the company, and the management team can retain control of the company.
- You and the company can get tax advantages.
- Your employees receive a retirement benefit.
- Your employees gain a direct stake in the company’s success, often leading to increased satisfaction, motivation and retention.
An ESOP could be an option if your company meets the following criteria:
- C or S corporation
- Stable business with established clients and markets
- Demonstrated history of strong, predictable profits and cash flows
- Experienced management team
- At least 30 employees; high tenure, low turnover
Starting an ESOP
Generally, the steps to start an ESOP include:
- Determine feasibility
- Perform a stock valuation
- Hire an ESOP advisory team, including an attorney
- Obtain financing
- Establish the ESOP Trust
Timing varies, but it generally takes a minimum of six to nine months to set up an ESOP. Our ESOP team can help guide you through the entire process.
Want to learn more?
- Go to ESOP Edge, our site dedicated to helping you manage your ESOP plan more effectively, or
- Contact our ESOP team for more information or to find a financial professional in your area.