What's an ESOP? A Holistic View

What's an ESOP? A Holistic View by Jack Veale an ESOP Advisor.

What’s an ESOP?

There are a number of articles on the legal translation of the answer for “What is an ESOP?” and yet they don’t cover the other management or advisory views of “What is an ESOP?”  This article will cover the different perspectives.  To be clear, ESOPs are for business owners or company shareholders of stock in a successful for profit enterprise, looking for a way to transition their ownership to others.  If you personally own stock in a closely-own and successful company, then this brief article is for you!  If you want to learn more about the history of ESOPs, check out this ESOP History page.

For the Accountant or Tax Advisor, “What is an ESOP?” represents an attractive tax strategy for the business owner, by deferring capital gains on the sale of their stock, or reducing corporate income taxes to help fund the ESOP purchase liability.  As Advisors, their concerns center around tax issues that would need to be surfaced and addressed, before an ESOP Trust is formed.

For the ERISA Attorney, “What is an ESOP?” means it is a qualified pension plan following the rules of ERISA, both in plan design and governance.  They usually construct documents setting the rules of the trust, much like a trust and estate attorney.  As advisors, they know ESOPs are a great tool for attracting and retaining employees.  They know how do develop qualified compensation plans too.They also know that compliance with ERISA law keeps companies out of trained eye of the DOL or Dept of Labor.

For an ESOP Lawyer, “What is an ESOP?” is answered as a special qualified pension plan with different rules for handling stock, valuating the assets and preparing plan documents that will not impact the IRS or DOL rules. Generally they are corporate, M&A or ERISA attorneys.  As an advisor, they want to structure the plan and governance documents to ensure the business owner’s goals are met, and that the company’s plan meets all of the ESOP Standards that most ERISA lawyers rarely develop or manage.  They also help the owner navigate through the due diligence process to avoid surprises, and many times lead the process from start to finish.

For the Wealth Advisor, “What is an ESOP?” translates to having great way of diversifying a business owner’s assets so all of the owner’s personal wealth is not tied up in the company.  As Advisors, they know there are technical aspects for converting company stock to a portfolio of the right stocks for tax and investment strategies.  Our wealth managers know the rules for ESOPs to avoid tax liabilities. 

For the Valuation Firm, the answer to “What is an ESOP?” depends what their role they play in the process: Are they advising on the “Buy Side” or “Sell Side.”  For the buy side, ESOP Valuation firms know ESOPs have rules to follow for arriving at a “Fair Market Value.”  ESOP Valuation advisors require special valuation experiences that typically are not found in normal company valuations.  If you hire a trustee to value the firm, you will not have a choice of who is selected to value the company; as the buyer is the ESOP Trust/Trustee.  If you are testing the waters for becoming an ESOP or sell side, you want a valuation firm that has that same ESOP experience but will not work for the trustee on the valuation.  They work for you to ensure you get the best value for the company.  They can help in the negotiations when the trustee makes an offer.  The closer the valuation is to the buy side, the better off all parties will be in knowing if an ESOP is right for the business owner.  But sometimes they disagree greatly.

“What is an ESOP?” for the ESOP Administrator or TPA: means their rules are similar but not the same as a 401k.  ESOP Administrators know there are very tedious ESOP rules to follow. And they are concerned with repurchase obligations and fulfilling communication requirements. Therefore, it is important to have an administrator that has a large number of ESOPs in their client list not just 401k’s.  Hiring a benefits administrator without ESOP experience is dangerous.

For the Trustee, “What is an ESOP?”  refers to a highly regulated trust, with both the IRS and the DOL rules to follow.  Trustees are considered ERISA experts by the DOL, expecting to have knowledge of ERISA law and are personally liable for various issues that can cause a breach of fiduciary duty.  They are responsible for setting the annual stock price, and must follow best practices on stock value, governance of the company and stock, and ensure they represent the beneficiaries, not other parties. Therefore, many companies hire independent trustees to manage the trust as trustees.  However, there are many more companies who elect to manage the trust internally, as they are less than 50% owned by the ESOP.

For investment bankers and other financial advisors, “What is an ESOP?” can be answered in a number of ways; as ESOPs are one of many ways a company can be sold.  Our investment bankers have years of experience, and will help guide business owners through the many choices they will have.  In some cases, they may not recommend an ESOP but a sale to a strategic buyer for a premium.  Investment bankers and commercial banks have resources to help find the funding sources for the buyout of the selling shareholders.  There are other financial advisors, who specialize in repurchase obligation and ESOP related liability insurance.

For Management Consultants, “What is an ESOP?” refers to a great succession planning tool and a key element to a long range plan.  When the business owner has developed a deep pool of senior managers, the use of an ESOP can be an effective legacy and compensation strategy.  If the company has not developed a deep pool of successor candidates, the chances of achieving an attractive selling price are lower, as valuation discounts of up to 25% occur.  As Advisors, they approach ESOPs as a great communication activity to improve the company’s ownership culture.  They encourage the development of empowered teams and leadership development. They know a big competitive advantage is developing a healthy ESOP Ownership Culture.

For the Family Business Consultant, “What is an ESOP?” usually means it is an elegant way of buying out siblings and other family members in a tax advantage way.  It also allows Families to build out a legacy, reducing family conflicts, and enable their employees to share the success of ownership in the family business.  As Advisors, they use the governance aspects of boards and team development to build out the future generation of owners, both family and employee.  They know that families and ESOPs can coexist favorably and successfully.

For the business owner or company shareholder, “What is an ESOP?” usually means the company will retain management and staff, who helped build the company.  In many company sale cases, once the company is sold, the new owner makes changes and employees leave. Typical ESOP owners have close relationships with their employees, many treating them like family.  For minority shareholders, an ESOP is a great way of monetizing their stock with a tax advantage to both themselves and the company.  In addition, an ESOP also allows the owner to gradually transition out of the business, both operationally and economic ownership without tension and organizational turbulence.  ESOPs also provide income security for the owner and the employees while allowing the selling owner to retain operating control while the transition unfolds.  Most business owners want to slow down but not leave.  ESOPs allow for this transition in a smooth and usually uneventful way.

At, we have invited only those qualified Advisors who have the background and experience to help a business owner through these different points of view. We are the only online community of ESOP Advisors with these broad views and perspectives. A properly developed ESOP transaction requires a team of diverse advisors who can work with the owner’s personal and corporate advisors through the ESOP Process.  Our advisors don’t cookie cut your ESOP documents, as many do, because your company is different from others and your needs are different.  You can be assured our advisors will work well together and service your needs throughout the transaction process.  They will customize your ESOP or other sales tactic to fit YOUR needs and expectations.  While there are a number of ESOP transaction advisors offering their technical experience, is a community of proven and vetted, local and diverse, advisors.  We won’t force you to work with one of our advisors. We think having a choice makes for a more favorable experience.  We encourage business owners to look around and ask a lot of questions with FREE advice from our qualified advisors.  If you are curious about what the ESOP process is, click here to view our ESOP Process, as it outlines a sample process for business owners to follow.  Or Call us at 860-232-9858 so we can arrange a FREE meeting with your local advisors to help you reach your goals.