How is an ESOP Installed?

[Guest SCUDDESLER]

Assuming that a sound pre-installation ESOP study has been completed (and confirms that an ESOP will satisfy the plan sponsor's objectives), what are the next steps that must be taken to actually install an ESOP? Assume that the plan sponsor is a C-corporation. Thanks.

[rcline46]

Privately held corps - Stock must be valued by recognized authority in valuing such companies, documents drafted just like any other 401(a) plan with all the special ESOP language and decisions made on put orders (corp, ESOP, corp, other shareholders, etc). Stock must be valued each year. Recordkeeping system must keep track of cost basis of each contribution. Just your run of the mill, normal monster headache plan.

Public corps - need some sort of SEC registration for ESOP purchasing the stock. Stock is market valued. Otherwise just more of the same as above.

[Guest kbutcher]

Depressing answer! Like any other major transaction in a company's life cycle, the ESOP transaction requires a team of professionals to efficiently and effectively adopt the plan and close the stock sale (assuming leveraged transaction). Such a team would include: lawyers, accountants, trustees (perhaps independent), valuation professionals, and plan administrators. Generally one of these professionals will act as the quarterback on the transaction to manage the other professionals and get the project completed. Our experience has been that this "quarterback" will generally be the client's first professional hired, the person who brought them the idea.

The first step after the completion of a solid ESOP feasibility study is to make certain that two other major obstacles are not insurmountable:

1. Value of the company

2. Financing for the transaction

Opinions vary, but it is popular to form an ESOP exploratory committee to engage a valuation firm to start the valuation process. If the valuation firm is experienced, they will generally keep an open line of communication with the committee. This will give all parties an idea of whether the valuation will be in the ballpark of the selling shareholder's expectations. It is common for the shareholders to have an overinflated idea of the value of their company. If this is true, you need to know at the start so that you do not waste time and money. Many times the feasibility study is completed by a valuation firm and it encompasses this step, if so, disregard.

If the transaction requires financial institute lending (rather than seller or internal financing), the next step is to create a financing memorandum and submit it to several friendly banks(hopefully with some ESOP experience). These banks should be able to provide you with some initial thoughts and ideas, specifically whether the deal is bankable.

Once these two obstacles are satisfied the following actions must be completed (obviously, not an exhaustive list):

-document drafting both corporate and benefit plan related

-negotiation of terms between the selling shareholder and trustee/committee

-plan employee communication process, is this going to be an "event" or is it communicated through paper or paperless mediums to the employees

-set closing date

It is not an easy process, but neither is selling your business or a portion of your business (essentially what you are doing).

I am sure others can add a ton to this, but those are some thoughts on the matter.

Regards,

Keith

[RLL]

For a closely-held company ESOP, the valuation of company stock is needed as of each date the ESOP acquires stock.

For a publicly-traded company ESOP, SEC registration is generally not required for the ESOP to purchase company stock unless employee after-tax or 401(k) contributions are to be used to acquire stock.

[Kirk Maldonado]

SEC registration is also required if rollover contributions are used to purchase employer stock.