How the structure works
An employee stock ownership plan is a retirement plan that invests primarily in the stock of the employer, and it holds the shares through a trust. In a typical ESOP transaction the trust buys some or all of the owner's shares, often with financing from a bank, from the company, or from the seller through a note that is repaid over time. A trustee acts for the plan, and under ERISA it must make sure the plan pays no more than fair market value, usually relying on an independent valuation. The Department of Labor investigates some of these deals and has brought cases where it believed a plan overpaid. The rules for C corporations and S corporations differ, and some sellers of C corporation stock may qualify for tax deferral if specific conditions are met.
What sellers and companies should prepare
Expect a full valuation process, with the trustee's appraiser examining financial statements, projections, and management assumptions. Clean, consistent financial records make that process smoother and the results more defensible. Think through what role you will play after the sale, since ongoing control or compensation terms are examined closely when the seller stays on. Consider the company's ability to service the acquisition debt and to meet its repurchase obligations when employees leave and are entitled to be paid for their shares. Communicate with key managers early, because their commitment often affects both value and the trustee's comfort with the deal.
Sorting out roles and terms
The seller, the company, and the trustee each need their own advisors, and the trustee's counsel represents the plan rather than the owner. We help sellers and companies evaluate whether an ESOP fits their goals, compare it with a sale to a third party, and negotiate price and terms with the trustee. We look at the financing, any seller note and warrants, and the governance of the company after the sale. Tax and valuation advisors are essential in these deals, and we coordinate with them so that the legal and financial pieces fit together.
