ESOP Feasibility and Valuation

We independently help determine if an ESOP is feasible for a company and value the worth of company.

  • Qualified Plan governed by ERISA.
  • Required to be invested primarily in the sponsoring employer securities.
  • May be used as a corporate finance technique.
  • Often used as an exit strategy for a retiring shareholder. The ability for the ESOP to incur debt and the ability for the selling shareholder to reinvest the proceeds on a tax deferred basis is very attractive.
  • Creates a market for the stock of a closely held company and make the purchase of that stock a pretax (deductible) expense.
  • During the past several years, expanded advantages for S Corporations
  • IRS Section 1042
  • Rollover - Allows the seller of stock to reinvest the proceeds from the sale in qualified replacement securities (conditioned on a sale of at least 30% of the company’s outstanding stock and that the reinvestment occur in the next 12 to 15 months).
  • A bank or other lender funds the transaction in order to take advantage of IRS Section 1042.

  • Valuation:
  • Must satisfy the Department of Labor and the Internal Revenue Service.
  • ESOP-specific considerations -
  • Adequate consideration
  • The effects of leverage and the treatment of debt
  • Fair compensation
  • Repurchase liability
  • Mandatory put option
  • Lack of marketability
  • Control and minority interests
  • Marketability issues
  • Using non-voting shares
  • Tax deductibility of ESOP contributions

  • In addition to the employee benefits for all employees, ESOPs are often regarded as the most effective and efficient method for business owners to transfer ownership of closely-held companies.

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