An Employee Benefit and Shareholder Liquidity Strategy
Employee stock ownership plans enable closely-held companies to sell equity, at a fair market value, to an employee trust. This is not a stock option program. Instead, an ESOP is an ERISA-authorized, defined contribution plan.
Read ahead for details on how an ESOP works, 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
A closely-held company establishes an employee stock ownership plan and periodically gives equity to an employee trust. In a contributory ESOP, the plan sponsor receives tax deductions equivalent to the fair market value of shares at the time of contribution.
How a Leveraged ESOP Works
Who is the Buyer?
An ESOP trust, representing at least 10 employees, buys company stock.
Who Sets the Price?
The price is negotiated with an institutional trustee, based on an independent valuation.
How is it Funded?
Commercial and/or seller financing, paid-off with pre-tax corporate cash flow.
Who Gets Shares?
Full-time employees are allocated shares proportional to their annual compensation.
How is Stock Earned?
A portion of all shares is allocated annually; the shares vest within 3-6 years.
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?
Selling shareholders gain liquidity & asset diversification
Can defer capital gains taxes on proceeds
Maintain upside potential & a role in the company
Plan sponsors receive tax deductions on sale amount
Can become income tax-free entities
Get a tool to retain & attract talent
Employees secure a unique retirement benefit (company stock)
Earn real stake in their company
Gain workplace stability & peace of mind
Employee Ownership Questions? We can Help.
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.