The Five Stages of Building a Successful ESOP

An employee stock ownership plan (ESOP) is often created in the process of selling a business and is a growing exit strategy among owners and other stakeholders. An ESOP is a retirement plan that provides a company’s workforce with an ownership interest in the company. Companies provide their employees with stock ownership and ESOP shares are allocated to those employees and may be held in an ESOP trust until the employee retires or leaves the company. The shares are then sold.

We begin by working with you on this five-stage process as you explore whether an ESOP is right for your company, creating your plan, obtaining financing, if necessary, and ultimately, the ESOP transaction and ongoing maintenance.

STAGE 1

Gathering Information

Similar to preparing a plan for strategic growth, key information must be obtained for review and analysis when considering an employee stock ownership plan for your company. A preliminary review of this information can help you clarify your financial and other business objectives. Don’t lose control because of a lack of planning. At minimum, this data should include:

• Succession plan priorities and the goals of the selling owner(s)
• Other available alternatives to an ESOP – such as a management buy-out, recapitalization, or selling to a strategic or financial buyer – and the pros and cons of each option relative to the selling owner(s) priorities
• Historical and projected financial results of the company
• Management structure, including the depth of the team and the experience and expertise of the C-level executives responsible for key areas within the company

STAGE 2

Determining if an ESOP is Right for Your Company

When planning the future of a business, understanding all options is essential. An ESOP feasibility study, or transaction analysis, is an important first step in providing shareholders and key advisors with the information they need to make an informed decision and determine if an ESOP is the right liquidity and succession strategy to achieve the desired goals and outcomes.

In some situations, a preliminary review may determine that an ESOP is not the appropriate choice to assist you in meeting your long-term goals. Together with our affiliated law firm, Stevens & Lee, and our affiliated investment bank, Griffin Financial Group, we assist companies in clarifying their objectives and exploring a broad range of non-ESOP strategic alternatives, including a leveraged management buyout, an old-to-young recapitalization, selling to a strategic or financial buyer or numerous other possibilities.

STAGE 3

Designing Your ESOP Plan

If an ESOP is ultimately the best strategic choice for you to accomplish your objectives, SES ESOP Strategies will assist you in exploring the appropriate size, structure and financing terms, among other areas, to ensure a successful transaction. This analysis will model how the ESOP will impact the company, the selling owners and the employees and may include the following:

• A preliminary valuation of the company to establish the approximate amount an employee stock ownership plan may pay
• An analysis of stockholders’ equity to assess the effects of the ESOP plan on existing shareholders and the company’s financial performance
• A study of plan design to decide the optimal structure of the transaction and plan features that should be incorporated into the ESOP

Over 90% of companies that go through Step 3 with SES ESOP Strategies implement an ESOP!

STAGE 4

Constructing Your ESOP

Once the company and its owners determine the appropriate ESOP structure, the construction begins!

SES ESOP Strategies assists companies in choosing advisors, negotiating key terms and conditions, and documenting and implementing the ESOP transaction in compliance with IRS/DOL regulatory requirements. If applicable, we can assist you in raising debt to fund the transaction.

STAGE 5

Maintaining Your ESOP

Following ESOP implementation, maintenance shifts away from implementation and focuses entirely on sustainability, compliance and managing cash flow.

SES ESOP Strategies’ affiliated full-service law firm, Stevens & Lee, can provide legal services to assist the company in maintaining the tax-qualified status of the employee stock ownership plan. We have long-standing relationships with third-party administration teams and can assist the company in selecting the team best suited to provide annual plan record-keeping and administration services.