ESOP Planning – 3 Steps for Year-End Success

End of road sign

December 15, 2021 Alex Mumblat

The holiday season is a time for taking stock. For companies either contemplating or managing an employee stock ownership plan, the year’s end carries some important considerations. Following a few key ESOP planning tips can help your business achieve its employee ownership goals in the year ahead.


Are you exploring an ESOP plan?

Get your house in order.

Businesses that prepare for transactions are best equipped to capitalize on ESOP sales and other M&A opportunities. Readiness steps may include:

  • Having audited or reviewed financial statements
  • Understanding your normalized EBITDA
  • Documenting all key elements of the business (clients, vendors, agreements, relationships, etc.)
  • Settling any open legal matters

For more, see CSG Managing Director Richard Harmon’s article on How to Prepare for a Transaction.

Avoid major corporate changes.

Stability facilitates smooth transactions. Market factors are out of your control, but management-driven turbulence – like tax accounting and corporate status changes, significant staffing moves, and capital structure alterations – can complicate an ESOP process. “Noise” clouds valuations, feasibility analyses, and ESOP structuring studies.

If your business has been notably altered in the past year, putting a little distance between those changes and an ESOP process may save time and effort in the long run. And if you’re contemplating both an employee ownership transaction and another major departure from your current operations, think about the potential impacts and benefits of either move before you act.

Engage an advisor sooner than later.

Although new ESOP plans no longer need to be adopted by December 31st to take advantage of same-year tax deductions, there’s still an end-of-year rush to close transactions. It takes several parties to consummate an employee ownership sale – including a trustee, valuation firm, counsel, and specialized advisors – and those professionals have limited capacity. As a result, Q4 deal crunches are common.

If you have a specific closing date in mind, or you’re simply focused on transaction efficiency, try to engage an ESOP advisor early in the new year. A Q1 feasibility study and structuring analysis can help you beat the rush and avoid some tense scheduling moments.


Is your company employee-owned?

Satisfy your internal loan requirements.

In a leveraged ESOP transaction, shares are allocated as the company’s inside loan to the employee trust is paid down. To facilitate these loan payments, the sponsor makes annual, tax-deductible cash contributions to the trust. The ESOP typically returns that money immediately to the sponsor as payment, in return for a pro-rata amount of allocated shares.

Your ESOP Promissory Note outlines the terms of this arrangement. Loan payment schedules, amounts and interest rates are clearly specified. While it may seem like second nature, make sure you’ve satisfied your annual obligations. If your company provides the trust with preferred dividends or contributions as part of its payments, those wire transfers must be made by year’s end. Default can result in action by the IRS, Department of Labor, and/or the trust itself.

Evaluate your ESOP’s performance.

ESOP optimization is often predicated on ongoing analysis and maintenance. A year-end review of your employee stock ownership plan should include the following questions:

  • Do our employee owners understand and appreciate the ESOP benefit?
  • Has the plan driven a meaningful lift in employee retention and productivity?
  • Are our company’s economic benefits (tax efficiency, cash flow, etc.) as anticipated?
  • Is our financing structure sustainable and competitive vis-à-vis current opportunities?

An ESOP plan that’s at least three years old may benefit from a formal tune up or a secondary transaction. Options may include loan restructuring, plan modifications, secondary sales, and buybacks.

Plan for repurchase liabilities.

Mature ESOPs (five years or older) must be prepared for an increasing volume of share redemptions. A good third-party administrator can help you anticipate the impending burden, but a more formal planning process can be worthwhile. Consider ordering a repurchase liability study.

An RLS can help companies forecast cash requirements, determine potential financial impacts and assess the overall sustainability of an ESOP plan. If potential issues are uncovered, an RLS can help provide a clear roadmap for future interventions.


Questions? Ask an ESOP professional.

If this begs a host of other employee ownership questions, it always helps to talk with a knowledgeable advisor. Since 2000, we've helped hundreds of companies nationwide with leveraged ESOP transactions.

Schedule a complimentary call with our team today.

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