ESOP transactions are a critical aspect of employee stock ownership plans (ESOPs). Check out these ESOP transaction questions.
What Is a Leveraged ESOP Transaction?
An ESOP transaction is leveraged if it borrows money to purchase shares of the employer’s stock. The loan transaction may be from a bank or financial institution, or the selling shareholder may finance the ESOP transaction by taking back a note for part or all of the purchase price. The ESOP transaction is usually secured by assets of the sponsor company. In some cases, the selling shareholder may be required to guarantee the loan or provide security for its repayment. An ESOP is the only kind of employee benefit plan that can use the credit of the company and its shareholders to finance the purchase of company stock. For all other qualified employee benefit plans, this would be a prohibited transaction under the Employee Retirement Income Security Act of 1974, as amended (ERISA).
SES ESOP Strategies and our affiliated FINRA-licensed investment bank can help with financing your ESOP transaction.
Most ESOPs used for ownership transition purposes are designed as leveraged ESOP transactions, although non-leveraged ESOPs can also be structured to provide significant tax benefits in connection with corporate acquisitions and divestitures.
Can a Majority Shareholder Remain in Control of the Company After Selling Stock to an ESOP?
The best way to remain in control following an ESOP transaction is to sell only a minority interest in the company to the ESOP. In addition, a shareholder may participate in the administration of the ESOP, subject to the fiduciary requirements.
ESOP Transactions as Acquisition Strategies
ESOP transactions can take the form of acquisitions. As ESOP companies mature, particularly 100% ESOP-owned S Corporations, they often find they have the resources and the strategic drive to purchase other companies. ESOP transactions can be a win-win situation for acquirers, sellers and employees, but there are many practical and legal considerations. We offer legal services to help you understand some of the opportunities and pitfalls of ESOP transactions to ensure your ESOP acquisition strategy makes sense.
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ESOP Transactions and Your Exit Plan
ESOP transactions often result in a need for an exit plan. At its core, exit planning is about making a significant change in ones business and life. Therefore, the very personal aspect of this planning mean business owners who are thinking about an exit plan struggle on many levels with advancing forward.
ESOP Transaction Exit Plans for Different-Sized Businesses
ESOP transaction exit plans differ greatly for different sized businesses. Business owners need to know where they fit on the exit planning transfer spectrum as well as how to begin your exit planning today.
ESOP Transactions Using Warrants
Warrants in ESOP transactions can be used to bridge the gap in a larger ESOP transaction between bank financing and the full price of the sale.