By Kyla Hansen, CPA, CVA

The decision to establish an employee stock ownership plan, or an ESOP, should never be taken lightly. It’s important to not only understand if an ESOP is right for your business but also to determine if it’s even a viable option. If you’ve done your due diligence and are ready to move ahead, here are five steps to follow:

1. Talk to a knowledgeable ESOP consultant.

This could be a trustee, a CPA, or an attorney who is experienced in ESOP transitions. This person can help you identify any preliminary issues with establishing an ESOP that you may have missed.

2. Perform an ESOP feasibility analysis.

If you haven’t performed an ESOP feasibility analysis, this should be at the top of your list. You have to make sure your business has enough employees and annual revenues to make an ESOP work. Remember, a good rule of thumb to follow is 20 employees and at least $10 million in annual revenues. A feasibility analysis will help to verify that your company’s cash flow and testing ratios are sufficient.

3. Organize your records. 

You will be asked to provide a great deal of information during the ESOP transition. This information will primarily be used to gauge the feasibility of the transaction, but will also help to determine your sale price. The first piece of information you’ll need to produce will likely be your company’s financial statements for the past few years. Consider obtaining a review of your financial statements before this happens to ensure your numbers are accurate. Ideally, you should have three to five years of issued financials statements available to provide.

4. Prepare projections.

When you sell a business, you are essentially selling its future cash flows. For this reason, the buyer (in this case, the trustee of the ESOP) will need this information to negotiate a sale price. Typically, you will be required to provide five years of projections.

5. Create your team.

A successful ESOP transition requires a team. There are two teams for the transaction: one representing you, and the other representing the ESOP. The professionals you will need include a CPA firm such as JAK ; an attorney for your business, the ESOP, and you; a trustee; and a valuation company. Because you, as the business owner, are paying for both teams, an ESOP often becomes more expensive than other sale transactions.

Stay on track for a successful ESOP transition.

Following these five steps is key to ensuring the success of your ESOP. If you’re ready to begin the process, we can help you get started and provide support along the way. Give us a call today to learn more.

By Kyla Hansen, CPA, CVA

Establishing an ESOP, or an employee stock ownership plan, might be the right option for your business, you, and your employees. If you’re thinking of implementing an ESOP, here are four factors you should consider first.

1. Your expectations for the sale.

Do you wish to turn over your business to your employees, even if it means potentially leaving money on the table? Selling your business to an ESOP will almost always net fewer proceeds than if you were to sell to a third party. It’s likely there will also be more costs associated with becoming an ESOP than with a third-party sale.

2. The size of your company.

To make the cash flow and annual retirement contribution limitations work, you must have enough employees, annual revenue, and net income. An accepted rule of thumb for establishing an ESOP is to have at least 20 employees who are qualified to participate in the ESOP and annual revenues of at least $10 million. For this reason, it’s important to perform an ESOP feasibility analysis before you get too far into the process.

3. The strength of your management team.

After you exit the business, who will take the reins? Having a strong management team in place—before you establishing your ESOP—will make the whole process go much more smoothly and likely increase your sale price.

4. Your employee turnover rate.

If your business has a high employee turnover rate, an ESOP may not be the right choice. Employee continuity is important for a successful ESOP. Without consistent employee numbers and leadership, an ESOP may not be a good fit.

Is employee ownership an option for your business?

The benefits associated with ESOPs apply only in the right situation. Before you decide to implement an ESOP, do your homework. Make sure it’s the right call for you, your family, and your employees. If you’re wondering if an ESOP would be feasible for your business, the CPA firm of JAK can help. Give us a call today to get started.