Our Business and Finance Group is widely recognized as one of the finest in the region. Whether you are executing a bet-the-company transaction or simply updating your standard employment forms, you will have the full attention of an experienced lawyer who asks the questions that haven’t occurred to you yet, who commands a whole spectrum of ways to engineer contract terms to address the issues specific to your business, and who knows how to negotiate – and how to close – to achieve your objectives.
Most closely-held businesses will be sold at some point in their life cycle. Potential buyers include family members, management, strategic or financial buyers, or the public market. For many business owners, significant portions of their net worth (and many years of their lives) are tied into their businesses. The decisions of when to sell and to whom are among the most critical the business owners will make. One possible succession strategy for many companies involves the formation of and sale of stock to an employee stock ownership plan (ESOP). An ESOP is a qualified benefit plan that is designed to be invested in the stock of the company that adopts the plan.
An ESOP is also the only qualified benefit plan that can borrow money to purchase stock. For this reason, it provides a liquidity outlet for selling shareholders that is not possible in many other internal buyouts. In addition, for both the selling shareholder and the company, the ESOP provides significant tax benefits. In some instances, the selling shareholder is permitted to defer the capital gain realized on the sale of shares to the ESOP. The corporation can enjoy meaningful tax savings as a result of both contributions to the plan and the status of the plan as a tax-exempt entity.
There is no one industry or business size that is best suited to an ESOP transaction. Our lawyers have completed ESOP transactions in manufacturing, professional service, retail, and many other types of companies. These businesses range in size from $10 million to $500 million in annual revenue. Some ESOP-owned companies have 20 employees and some have 2,000 employees.
Transactions involving an ESOP cover many different substantive areas, including corporate finance, business valuation, taxation, corporate governance, employee benefits, and other issues typically found in acquisitions and dispositions. Our lawyers have represented business owners, ESOP trustees, and lenders in these matters. The complex legal framework of an ESOP transaction requires careful consideration of certain questions; our lawyers have counseled many companies on these issues to achieve a favorable result for the seller, the company, and the employees.
Our lawyers have also guided clients through reviews or audits by the Department of Labor and the Internal Revenue Service regarding their ESOPs and transactions involving an ESOP.
In addition, we have advised ESOP fiduciaries regarding purchases of stock by the ESOP, sales of stock by the ESOP, and many other transactional and non-transactional questions addressed by the fiduciary of a qualified benefit plan.
To achieve partial or full liquidity for a significant stake in a business and to provide an incentive to employees to participate actively in a company’s growth, an ESOP can be an effective, tax-efficient solution to ownership transition.