What's an ESOP?

An Employee Benefit and Shareholder Liquidity Strategy

An employee stock ownership plan (ESOP) enables privately-held companies to sell equity, at an independent valuation, to an employee trust. These are not stock options plans. Instead, an ESOP is an ERISA-authorized retirement plan that invests directly in employer securities.

Read ahead for details on how ESOPs work, key benefits, and employee ownership pros and cons.

And for a quick study on the basics of leveraged ESOPs, download our concise guide.

Two Common Types of Employee Stock Ownership Plans

 
Piggy Bank

Contributory ESOP

A closely-held company establishes a plan and periodically issues new stock to an employee trust. Cash can also be contributed to the trust so that it may buy company shares. The sponsor receives tax deductions equivalent to the fair market value (FMV) of equity at the time of contribution.

Cycle

Leveraged ESOP

Equity is sold by the plan sponsor to an employee trust in a financed transaction. Selling shareholders are paid FMV and can defer/potentially eliminate taxes on those gains. The company receives income tax deductions equivalent to the leveraged ESOP sale amount.

How a Leveraged ESOP Works

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Money in Hand

Who is the Buyer?

An employee stock ownership trust, representing at least 10 ESOP participants, buys company stock.

Price Tag

Who Sets the Price?

The price is negotiated with an institutional trustee, based on an independent valuation.

Dollar Bills

How is it Funded?

Sponsors borrow money on the trust's behalf, in the form of third-party financing and/or seller notes.

Distribution

Who Gets Shares?

Full-time eligible employees are allocated company shares, proportional to their annual compensation.

Growing Wealth

How is Stock Earned?

A portion of all ESOP shares is allocated annually; the shares vest within three to six years.

Check in Hand

How do Employees Cash Out?

Vested stock is sold back to the company, at a current valuation, when employees depart.


Who Benefits from Employee Ownership?

 
Business Owner

BUSINESS OWNERS

Selling shareholders gain liquidity and asset diversification

Can defer capital gains taxes on sale proceeds

Maintain upside potential and an important role in the company

Factory

COMPANIES

Receive tax benefits that enhance corporate cash flow

Employee-owned S corporations can become income tax-free entities

Create a novel employee benefit plan to retain and attract talent

Employees

EMPLOYEES

Full-time employees earn ownership interest and gain a unique retirement benefit

Can reap the benefits of company performance

Employee owners secure workplace stability and peace of mind


ESOP Pros & Cons

These strategies carry significant benefits, but it's important to understand the full range of tax benefits and corporate implications. If you own or advise a private company, and you're considering a transaction, it's also wise to compare employee ownership plans against other M&A options.

LEARN THE PROS & CONS
COMPARE M&A OPTIONS

 

 

Employee Ownership Questions? We can Help.

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When CSG Partners was founded in 2000, we made education a priority. That remains central to everything we do. So, if you have questions about selling to an employee stock ownership plan, or how to prepare for a transaction, or operating as an employee-owned company, you've come to the right place. You'll find answers below and even more on our ESOP Resources page.

 
 
 
 
 
 

FIND MORE RESOURCES

Our full ESOP library includes webinars, podcasts, and articles by our experts.

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ASK QUESTIONS

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