You’re Ready to Establish an ESOP — Now What?

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.