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 that 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 single 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.
Our lawyers have represented business owners, ESOP trustees, and lenders with different components of ESOP formation, transaction and governance, including corporate, finance, business valuations, taxation, employee benefits, and other issues typically encountered in acquisitions and dispositions. The complex legal framework of an ESOP transaction requires careful consideration of certain questions. We have counseled many companies on these issues to achieve a favorable result for the seller, the company, and the employees. In addition, our lawyers are experienced in advising clients on the tax benefits and issues arising when ESOPs are involved in the purchase or sale of a business and often advise on the tax compliance requirements of operating an ESOP, including the rules related to exempt loan transactions.
- ESOP planning, structuring, and valuation
- Guiding clients through reviews or audits by the Department of Labor and the Internal Revenue Service
- Structuring and refinancing ESOP acquisition loans
- Advising 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
- Achieving partial or full liquidity for a significant stake in a business
- Providing an incentive to employees to participate actively in a company’s growth