Employee stock ownership plans offer multiple advantages for workers, corporations, and key shareholders.
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Companies use ESOPs to achieve a variety of outcomes including capital financing, ownership buyouts, and employee motivation.
The process of establishing an ESOP can be tricky, even for experienced business leaders. The first hurdle you'll need to address is the reason why you want to establish an ESOP in the first place. Employee stock ownership plans are effective business tools, but they do come with baggage, i.e. consequences that will affect your current shareholders and the future of your business. If you aren't crystal clear about the benefits you'll receive from an ESOP, then you may want to postpone your decision.
Given the complexities involved with ESOPs, most companies choose to employ an ESOP consulting firm to help them set up and administer their plan. Although you may encounter many firms who claim ESOP expertise, it's important to find a consultant who is capable of giving you the best possible advice. Here's how to find them…
- Feasibility analysis. You need to identify a consultant who will have an honest conversation with you about the feasibility of an ESOP for your business. If the firm is eager to pick up a sale, they may downplay the disadvantages of an ESOP. On the other hand, if they have little experience or expertise with ESOPs they may try to direct you toward more familiar (but less beneficial) resources.
- Design expertise. Ideally, you are looking for a consulting firm that is at the top of their game and has a long track record of ESOP design and implementation successes. Good ESOP consultants will address critical topics like stock valuation, vestment policies, and employee/shareholder communication strategies. The consultant should also be willing to explore the idea of a leveraged ESOP.
- Impact assessment. An ESOP will undoubtedly have an impact on your company. An effective ESOP will proactively describe its impact on your financial models, your shareholders, and your corporate tax burden. Expect your consultant to conduct a liquidity analysis that determines your companies repurchase liabilities.
- Administrative capacity. ESOP consultants play an ongoing role in the maintenance of the plans they help implement. The consulting firm you use should have the capacity to be involved in annual allocations, management reports, employee benefit statements, benefit calculations, and other tasks associated with the continuing operation of your ESOP.