What's an ESOP?

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

 
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Contributory ESOP

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.

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Leveraged ESOP

Equity is sold by the plan sponsor to an employee trust in a financed transaction. Selling shareholders are paid fair market value 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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Who Benefits from Employee Ownership?

 
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BUSINESS OWNERS

Selling shareholders gain liquidity & asset diversification

Can defer capital gains taxes on proceeds

Maintain upside potential & a role in the company

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COMPANIES

Plan sponsors receive tax deductions on sale amount

Can become income tax-free entities

Get a tool to retain & attract talent

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EMPLOYEES

Employees secure a unique retirement benefit (company stock)

Earn real stake in their company

Gain workplace stability & peace of mind


ESOP Pros & Cons

Employee stock ownership plans carry significant benefits, but its important to understand the full range of attributes. If you're considering a transaction, it's also wise to compare ESOPs 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.

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