A better understanding of the advantages and disadvantages of ESOPs can help any business owner determine if a partial or total sale to an ESOP is a solution that makes sense. And that owner needs professional advisors who have been through the process many times.

WHAT IS AN ESOP?

An ESOP is a qualified employee benefit plan that is structured to primarily invest in employer stock. The first step to establish an ESOP is to set up a trust to purchase stock from the owner(s). After the ESOP trust is established, the ESOP borrows money from an outside lender to buy all, or a portion, of a business. The ESOP repays its loan through periodic pre-tax contributions made by the company. As the loan is paid down, shares are released from collateral, and allocated to eligible employees based on their level of compensation. The longer an employee works for the company, the more shares that are allocated to his/her account, and the more the employee becomes vested in his/her account, and thus in the company.