ESOPs can be an excellent way for your company to transition its ownership and/or improve productivity.
ESOPs can offer you a controlled, tax efficient means of ownership transition - unlike a merger, IPO or sale to an outside buyer. However, there are some limitations to what ESOPs can offer.
- ESOPs are complex. There's a lot to learn when setting up an ESOP and this can be a deterrent for some. However, SES Advisors can assist you in getting over the learning curve.
- ESOPs can be expensive to implement. Legal fees, stock valuation and lender costs will depend on the size of the transaction, but can mount quickly.
- ESOPs also need annual upkeep. A valuation of your company must be performed on an yearly basis to appraise the value of your business. Annual ESOP recordkeeping is also necessary. Finally, as legislation changes, so will your ESOP plan document need to change and there can be some legal costs associated with these amendments.
- Excessive Leverage: To initially implement an ESOP, the company may borrow money from an institutional lender. In order to do so, a company will need to have sufficient cash flow and unencumbered assets.
- Complicated Accounting: ESOP debt is recorded as employer debt and this can be tricky for accountants to grasp. As always, we're happy to work with your advisors to get past such road bumps.
As with any business decision, the benefits must be weighed against the disadvantages and we'd be happy to assist you in seeing if an ESOP will be the most advantageous way to transition ownership in your company.
