Is an ESOP right for your company?

• If you think your company would sell for less than approximately $3 million, you will probably find that the expenses to implement an ESOP will exceed the benefits of installing one.
• The payroll of your company is an important criteria determining the feasibility of an ESOP. A sponsoring corporation can deduct annual ESOP contributions of up to 25% of their eligible payroll. Eligible payroll usually excludes the compensation of the major shareholders and everyone’s compensation is capped at $200,000 for a calendar year. We’d recommend that you have a minimum eligible payroll of approximately $800,000 to consider an ESOP.
• Your company must be a C or S corporation at the time of the transaction. No other forms of business ownership are eligible to do an ESOP.
• Your company should have a history of sufficient revenues and income to enable you to secure favorable bank financing. You also must have adequate collateral.
• You must have competent successor managers to manage the business when the selling shareholders depart the company. If not, you could see a rapid departure of employees and customers after the transaction. The bank will also require evidence that competent management exists to run the company when the current shareholders depart.

Developing an ESOP Strategy

The ESOP Capital Strategies, Inc., Strategy Develop process is designed to help you gain a practical perspective on the critical issues that determine if an ESOP makes sense for you or not. It starts with a series of probing questions and ends with a discussion about the results of some pretty, rigorous number crunching. Initial issues discussed in the goal and objective setting process include:

• What are the goals and objectives of the existing shareholders?
• Do some shareholders want to sell their stock now or in the future?
• Do they want to diversify their personal holding in a company?
• Do the majority shareholders want to buy back the stock of the minority shareholder?

You should consider your company’s current incentive plans such as:

• Are the company’s current qualified retirement and profit sharing plans meeting expectations?
• Are the proper incentives in place to attract, retain, and reward the executive and management team?
• Can the management team offer the required incentives to motivate their employees?
• To what extent can the company’s cash flow support additional debt to leverage an ESOP transaction without encumbering the business operations and negatively impacting other qualified plans already in place?

Other issues to consider include:

• Does the company have a management and ownership succession strategy?
• Does the current internal culture of the company contribute to the achievement of its business objectives?
• What is the current corporate governance of the company and how will it be affected by an ESOP transaction?

Next, we’ll move into the more quantitative aspects of the decision process. To accomplish this, you’ll need to provide us with financial data including:

• A completed copy of our ESOP fact finding questionnaire
• Your most recent three years of financial statements
• Employee census and compensation information
• A copy of your business plan

We start by estimating the current value of the business on a preliminary basis usually within a range. Then we model and structure various design alternatives that accomplish the shareholders goals and objectives. And finally we estimate the adequacy of the cash flow to make ESOP contributions and pay off any debt used in the transaction.