ABRC-ESOP

Many Professional Advisors Won't Reccomend ESOPs

2008-04-25T12:21:00.000-07:00

I have evidence to support the statement, “Many professional advisors without ESOP expertise will lean towards business transition alternatives that allow them to share their expertise and receive compensation for it.”

I recently met with a prospective client who shared a memo from their attorney discouraging ESOPs. After describing several “viable” exit alternatives, here is what the memo had to say about the ESOP:

“…although the ESOP is an option, it is likely not a very good option for the corporation at this time. The administrative expense and ongoing responsibility significantly outweighs the benefit to you in accomplishing your desired return. You will not only fail to achieve your desired goal…but you will likely look back and wish you had never set up the ESOP.”

I think this is a classic illustration of how business advisors approach the ESOP concept and might explain why there are still so few of them.

Why Professional Advisors Don't Reccmond ESOPs

2008-04-21T10:09:00.000-07:00

Even if professional advisors are aware of the benefits of ESOPs, they may feel that they will be unable to assist their clients with the implementation of an ESOP. Since a major goal of a professional advisor is to share their expertise and receive compensation for it, they are likely to look for other business transition alternatives where they can utilize their expertise. As a result, there are situations where an ESOP might be a great fit but is not seriously considered. I am not questioning the integrity of these very competent professionals; rather, I am identifying a legitimate barrier to increasing the ESOP growth rate.
(Aaron Juckett)

Growing Interest in ESOPs off-Shore

2008-03-27T13:31:00.000-07:00

The American ESOP cconcept intall by companies like ABRC is gaining intertest by other countries. Below is an excerpt from an article posted in http://www.arabianbusiness.com/. It first discusses the success of ESOPs in the U.S and then goes on to discuss the advantages of creating the ESOP opportunity in UAE.

Staff ownership could boost profits
Lynne Roberts on Thursday, 27 March 2008

Gulf firms could boost profits, increase staff loyalty and survive for longer by giving employees a financial stake in their business, a group of experts said on Wednesday.

Companies with Employee Stock Ownership Plans enjoy a range of benefits, including increased staff loyalty and improved corporate financial transactions, according to research revealed ahead of a seminar on the issue next month.

A study of ESOP firms found sales, employment and profitablity was around 2.4% higher than companies without the scheme. 82% of companies said revenue increased after applying ESOPs, while 72% indicated they saw an increase in profitability.

Employee Stock Ownership Plans are currently estimated to hold more than half a trillion dollars in assets, and cover over 10 million workers in the US alone.

Stock ownership by employees in the Gulf region is rare, however, where around 70% of privately held companies are family owned and run largely by expatriate management.

Click Link to see complete article http://www.arabianbusiness.com/514852-staff-ownership-could-boost-profits

Management Acquires Hannibal Industries from Mitsui USA Utilizing an ESOP

2008-03-24T13:44:00.000-07:00

Senior management of Hannibal Industries Inc., led by President Blanton Bartlett, today announced the purchase of the company from Mitsui & Co. (U.S.A.), Inc. (Mitsui USA) through the formation of an Employee Stock Ownership Plan (ESOP). Financial considerations of the transaction were not disclosed.
Hannibal Industries Inc., founded in 1985, has become a premier manufacturer of carbon steel tubing to customers throughout the Western United States. In 2000 the company added a Material Handling division in addition to its Steel Tube division, enabling it to quickly become the largest manufacturer of storage racks and provider of warehouse solutions west of the Rocky Mountains.
“Our team is very excited about the purchase, and enthusiastic about the opportunities ahead,” Bartlett said. “We are grateful to Mitsui USA for its support over the years and delighted that our colleagues, who’ve been so instrumental in Hannibal’s strong performance, will be able to build on the company’s success as owners.”
As for the future, Bartlett said, “Our plan is to concentrate on the two current lines of business and grow through the addition of new product lines and expansion into other areas of the country. Our company is well positioned to implement both current and future business strategies.”
The executive team responsible for the success of the Vernon, CA-based Hannibal under Mitsui USA’s ownership will continue to run the company.
Speaking on behalf of the senior management team, Bartlett added that, “We are gratified that we are able to provide the opportunity of ownership to the employees. Our staff has been one of the primary reasons for our success and we look forward to continuing to improve the value that we offer our employees as well as our customers.”
About Hannibal Industries, Inc.
Hannibal manufactures steel tube and material handling products. The Company is a value added metal fabricator offering custom carbon steel tubing products to original equipment manufacturers (“OEMs”), distributors and retailers in residential construction, automotive, general manufacturing, exercise equipment and other markets. Hannibal is also a leading designer and manufacturer of a wide range of racking products for distribution and retail customers.

ESOP Fees

2008-02-19T09:05:00.000-08:00

A recent article in the Wall Street Journal titled "Sale Gives PR Firm the Benefits of Becoming Employee-Owned" Sale Gives PR Firm the Benefits of Becoming Employee-Owned caught my eye. It seems the owner of a 17-person firm wanted to sell his company to his employees. The owner had decided an ESOP was the best way to go, until he learned the cost of the installation, which was upwards of $100,000!

The kind of fees discussed in the article is quite exorbitant. This might explain why there were 120 new ESOP plans installed in 2007. Most ESOP providers are not interested in providing services to smaller companies or are interested in doing so only at big-company fee rates. The small business segment is under-served for several reasons, but the main reason is this: Most firms do not specialize in doing just ESOPs. Since ESOPs are just a minor portion of their total business, doing a smaller company ESOP is not cost-effective for them. They are unable (or unwilling) to scale their fee to the size of the company.

Can a small company afford an ESOP? Yes, if you work with an ESOP consulting firm that focuses 100% on ESOPs, whose pricing structure is scaled to fit the number of employees, and one that charges a flat project fee (not hourly) so there are no surprises. Doing it this way helps ensure you pay only a fraction of the $100,000 quoted in the article.

ESOPs In General and S-Corporation ESOPs In Particular

2008-01-10T10:25:00.000-08:00

In response to recent news articles concerning Employee Stock Ownership Plans (ESOPs), Evan L. Rhodes, president of American Business Resource Corporation, and a nationally recognized ESOP expert, comments on ESOPs in general and S-Corporation ESOPs in particular.

Employee Stock Ownership Plans (ESOPs) have been in the news lately as a financial strategy to take a company from public to private. An ESOP is a type of employee retirement benefit plan designed to invest primarily in employer stock. To establish an ESOP, a firm sets up a trust and makes tax-deductible contributions to it. Employee Stock Ownership Plans have been around since the 70's and have been well-regarded as a solution for large, public companies. Many small business owners are unaware that Congress reformed ESOPs in 1998 to enable small, privately owned companies to qualify for it.

Evan Rhodes, president of American Business Resource Corporation, and a nationally recognized ESOP expert, points out some of the things that S-Corporation ESOPs can do:

- Increase cash flow. In 1998, Congress took steps to radically reform ESOPs: they decided to include S-Corporations as a type of company that could be sold to an ESOP. Additionally, they provided that if the business was sold to an ESOP, the company would be exempt from all income tax on its profits. The money the owner used to pay in taxes may now be used to partially or fully fund the sale of the business to the ESOP. Not only does this create a market for smaller companies, it also funds the transaction through tax savings and provides retirement benefits to employees.

- Attract and retain employees. Generation-X'ers don't work for just a paycheck; they want an equity stake in something they are helping to build. With an ESOP, all employees and especially key employees, have adequate incentive to growthe business. Their beneficial interest in the ESOP is calculated based on their salaries as a percentage of overall payroll. The higher their salary the more beneficial interest they get in the ESOP. The better the business does, the higher the ESOP value becomes. These employees can potentially make more off the ESOP than their 401(k). In fact, many employees have been known to retire as millionaires simply by having an ESOP in place.

- Transfer a business. The S-ESOP is an exceptional way to transfer business interests to future generations, especially in situations in which the business interest has cash flow and is expected to appreciate substantially in value. The transaction is structured as a sale. Since an ESOP is a retirement plan, the company no longer pays most state or federal income taxes, greatly increasing cash flow for the company while offering an excellent exit strategy for the owner and an excellent reason for family members and employees to remain with the company.
Mr. Rhodes cautions that ESOPs are not for everyone:

- The ESOP program is not currently available to professional associations or professional corporations.

- The S-ESOP should only be considered by business owners who have a profitable business, have more than tenemployees, want to keep the business going, and keenly understand the difference between ownership and control.

- In the last several years, there has been a steady increase of businesses forming as, or converting to, an L.L.C.structure. While this structure is called a corporation, its legal structure is closer to that of a partnership. Since there is no issuance of stock in an L.L.C., you cannot directly install an ESOP in an L.L.C. For those with a 'C' Corporation and other entity structure such as an L.L.C., the business can be converted to an 'S,' but only after proper tax and legal planning.

Mr. Rhodes concludes, "When properly designed, the S-Corp ESOP can help lower taxes, increase cash flow, motivate employees and best of all, fund the owner's exit while creating a competitive advantage using monies previously used to pay taxes."

To interview Evan Rhodes about Employee Stock Ownership Plans, call (480) 556-9928 ext. 111.

Evan L. Rhodes is owner and president of American Business Resource Corporation (http://www.abrc-esop.com/), a company based in Scottsdale, Ariz. that focuses 100% on helping private companies design and implement Employee Stock Ownership Plans.

ESOPs Are In The News

2007-12-24T09:44:00.000-08:00

Employee Stock Ownership Plans (ESOPs) have been in the news lately as a financial strategy to take a company from public to private. An ESOP is a type of employee retirement benefit plan designed to invest primarily in employer stock. To establish an ESOP, a firm sets up a trust and makes tax-deductible contributions to it. Employee Stock Ownership Plans have been around since the 70’s and have been well-regarded as a solution for large, public companies. Many small business owners are unaware that Congress reformed ESOPs in 1998 to enable small, privately owned companies to qualify for it.

15% of Inc. 5000 Companies Plan to Sell to an ESOP

2007-09-17T11:45:00.000-07:00

Roughly 15% of the companies on the Inc. 5000 list of fastest growing private companies that responded to an Inc. magazine survey say that selling to an ESOP is a likely strategy for transferring ownership. The percentage is not precise because only 62% of the companies on the list responded to the survey, and the poll let respondents choose more than one option.

is a company considered too small for an ESOP?

2007-09-14T08:02:00.000-07:00

Evan L. Rhodes: Government guidelines state that a company must have more than 10 employees to qualify for an ESOP. It is also worth noting that the ESOP program is not currently available to professional associations or professional corporations.

Can I use an ESOP to make my L.L.C. Tax Exempt?

2007-08-24T08:54:00.000-07:00

Evan L. Rhodes: In the last several years, there has been a steady increase of businesses forming as, or converting to, an L.L.C. structure. While this structure is called a corporation, its legal structure is closer to that of a partnership. Since there is no issuance of stock in an L.L.C., you cannot directly install an ESOP in an L.L.C.

Since S-Corps and the L.L.C. are taxed identically, the advantage lies with the S-Corp and its ability to be tax-exempt through utilization of an ESOP. The L.L.C. provides more personal liability protection to ownership compared to the standard S-Corporation. However, an S-Corp ESOP provides liability protection at least equal to and possibly greater than the L.L.C.

An S-Corporation can be a member of an L.L.C. Since an L.L.C. is a flow-through tax entity, the tax burden on the income of the L.L.C. (K-1) passes through to the S-Corporation. The S-Corporation is taxed on those proceeds based on the tax rate of its shareholder. In the event the S-Corporation's shareholder is the tax-exempt ESOP, then all proceeds received from the L.L.C. are also tax-exempt. It is clear that there are many potential benefits involved from converting or combining tax-exempt S-Corporations and L.L.C.'s.

How Can I Use ESOP to Attract Quality Employees?

2007-08-16T07:54:00.000-07:00

Evan L. Rhodes: Many companies use ESOPs as another benefit they can offer in a competitive labor market. Companies with a 401(k) use the ESOP as one more lure. Many employers tout the fact that they are employee-owned in their recruitment ads and corporate web sites. Generation-X’ers don’t work for just a paycheck; they want an equity stake in something they are helping to build.

Can I Use ESOP to Motivate Employees?

2007-08-10T08:31:00.000-07:00

Evan L. Rhodes: There is considerable research linking ESOPs to substantially improved corporate performance. The company becomes a major portion of the employee’s retirement plan and everyone has a stake in it. Improved corporate performance benefits everyone, not just the owner.

Can an ESOP Finance Growth?

2007-08-09T08:12:00.000-07:00

Evan L. Rhodes: An ESOP can make your company tax exempt. At the 40% tax rate, this equals a 66% increase in cash flow which can be used to buy other companies, buy new equipment, or any other corporate purpose. As long as the money is left in the company to fund growth, you never pay any taxes on it or on the earnings resulting from the growth.

How Can an ESOP be an Exit Strategy?

2007-08-08T08:06:00.000-07:00

Evan L. Rhodes: An ESOP allows owners of closely held companies to sell to an ESOP for the full fair market value. The government subsidizes the sale by allowing the company to become tax-exempt thus the dollars that previously went to pay taxes may be used to fund the purchase.

What should I look for when choosing a Third-Party Administrator (TPA)?

2007-08-07T07:27:00.000-07:00

Evan L. Rhodes: A good TPA will:-Collaborate with your ESOP consulting firm to review your options and assist in building a plan that meets your needs

-Constantly monitor Internal Revenue Service and Dept. of Labor Regulations to determine their options for and effect on existing and newly created ESOP plans

-Analyze employee census information to determine eligibility for each plan year

-Conduct Department of Labor and/or Internal Revenue Service audits of your ESOP plan from their office trustees, investment advisors, and attorneys involved with the plan.

Who should consider installing an ESOP?

2007-08-06T08:04:00.000-07:00

Evan L. Rhodes: Business Owners who wish to:
-Infuse working capital into the company by reducing tax liability
-Provide capital for family members who have taken over the business
-Acquire another company with pretax dollars
-Induce employees to remain with the company
-Create private market for company stock
-Increase employee productivity and thereby increase company profitability
-Improve the effectiveness and reduce the cost of employee benefits including pension and profit-sharing plans
-Sell or merge the company to employees or select management team
-Sell or merge the company to family members
-Sell or merge the company to outside third party
-Put in place a controlled exit strategy from the company
-Eliminate corporate taxes and increase cash flow
-Cash out one or more shareholders and avoid capital gains tax
-Recover taxes paid in prior years
-Refinance existing debt, making both principal and interest tax deductible

Who can qualify for the S-ESOP?

2007-08-03T07:33:00.000-07:00

Evan L. Rhodes: The S-ESOP should only be considered by business owners who have a profitable business, have more than ten employees, want to keep the business going, and keenly understand the difference between ownership and control. In general, professional corporations that require the shareholder to be licensed in that industry, such as medical and legal professions, cannot become an ESOP. When properly designed, the S-Corp ESOP can help lower taxes, increase cash flow, motivate employees and best of all, fund your exit.

What advantages do ESOPs bring to employees?

2007-07-30T04:39:00.000-07:00

Evan L. Rhodes: ESOPs are an effective motivational tool. With an ESOP, all employees, especially key employees, have adequate incentive to grow the business. Their beneficial interest in the ESOP is calculated based on their salaries as a percentage of overall payroll. The higher their salary the more beneficial interest they get in the ESOP. The better the business does, the higher the ESOP value becomes. These employees can potentially make more – as much as two to five times more – in the ESOP than their 401(k), without affecting take home pay.

Why is Congress supporting ESOPs if it means companies do not have to pay taxes?

2007-07-26T07:06:00.000-07:00

Evan L. Rhodes: The basic structure of the S-Corp ESOP consists of a trust wherein the single shareholder of that trust is the ESOP. The S-ESOP, by law, is a tax-free entity. This means that the S-Corporation, which is a pass through entity, is taxed at the shareholder level, so the business becomes free of federal taxes. For those with a ‘C’ Corporation and other entity structure, the business can be converted to an ‘S,’ but only after proper tax and legal planning.

Congress encourages ESOPs as a method of strengthening the free private enterprise system and small business growth while simultaneously providing retirement programs for the baby boomers and future generations. Simply put, the more businesses stay open, the more jobs there are resulting in more revenue for the government.

ESOPs have been making headlines since Zell used it to purchase the Tribune. What is it exactly?

2007-07-25T08:07:00.000-07:00

Evan L. Rhodes:: Employee Stock Ownership Plans have been around since the 70’s. However, the Employee Stock Ownership Plan for S-Corporations – what I call S-ESOP – has only been in place for the last nine years. In 1998, Congress took steps to radically reform ESOPs: they decided to include S-Corporations as a type of company that could be sold to an ESOP. Additionally, they provided that if the business was sold to an S-ESOP, the company would be exempt from all income tax on its profits. The money the owner used to pay in taxes could now be used to partially or fully fund the sale of the business to the S-ESOP. Not only does this create a market for smaller companies, it also funds the transaction through tax savings and provides retirement benefits to employees.

Question: What options does a business owner have to exit the business?

2007-07-24T07:36:00.000-07:00

Evan L. Rhodes: Many small to mid-size businesses face a transition dilemma: they are either too small to be bought by a public or private equity company, too expensive for a third party buyer, or too valuable to close down. Several dream about an IPO but are fazed by financial markets now demanding that companies show a large and growing market opportunity, sustainable business model, meaningful revenues with significant international exposure, just to name a few IPO criteria. One option that is proving viable for closely-held businesses is the ESOP, which stands for Employee Stock Ownership Plan.

Preparing for retirement using an ESOP

2007-07-23T11:12:00.000-07:00

Question: What should business owners be doing to prepare for retirement?

Evan L. Rhodes: Business owners in the 50+ age bracket face a rude awakening. These baby boomers will want to exit and retire at a time when it is increasingly more difficult to find buyers for their business. For the last six years, the average number of businesses offered for sale and the number actually sold has been fairly lopsided. In 2001, over 1.5 million businesses were offered for sale yet only 250,000 were successfully sold (1 out of every 6). If this trend continues, five businesses out of every six will have to fold. Business owners should start planning seriously. They might consider implementing an Employee Stock Ownership Plan or ESOP.

ESOPS - Wave of the future?

2007-04-16T08:26:00.000-07:00

An article in the April 9, 2007 edition of the Wall Street Journal elevates the national discussion about ESOPs. The article entitled "Why Flush Financiers Court Unloved Businesses" by Karen Richardson and Serena Ng (Wall Street Journal, Page C1) discusses the four-way bid by private-money managers to acquire Daimler-Chrysler. One proposal is to convert Chrysler to an S-Corporation and adopt an ESOP, similar to Zell's plan for the Tribune.
The article explains the advantages of converting a public company to private: "Shareholders of an S-Corporation generally are required to pay tax on income they earn from the company, but under a tax-code exemption, they aren't taxed if they are part of an employee stock ownership plan, or ESOP. Once private, Tribune will adopt an ESOP, meaning shareholders won't need to pay taxes on income from Tribune."
"The company is treated, effectively, like a charity. It'll be a tax-exempt entity," says Robert Willens, an accounting-and-tax analyst at Lehman Brothers. Other financiers may be eyeing proposals tied to ESOPs. Mr. Willens expects Chrysler...to also be structured as an ESOP and S-corporation. "This is going to be the wave of the future," he says.
My travel schedule will take me to Sacramento, Chicago and Madison, WI in the next month. If anyone would like a personal meeting, please call or email me ASAP.
Regards, Evan L. Rhodes American Business Resource Corporation ESOP is the Key

Advisor Motivations Regarding S Corp. ESOPs

2007-03-13T11:47:00.000-07:00

One of the biggest barriers to employee ownership is that many business owners or executives simply do not understand how it works. They make assumptions about these plans that inaccurately lead them to believe it could not work for their kind of business. For example, they wrongly think that the only way that employees can become owners is to actually buy shares or believe that ESOPs give employees the right to elect management.

Often, their accountants or lawyers tell them that employee ownership would not work for them, sometimes out of ignorance, sometimes because they fear that if the company goes in that direction, they might lose their business to another adviser more expert on employee ownership. (ESOP Report)

The Role of "The Board of Directors" in an ESOP

2007-03-07T11:39:00.000-08:00

This post was published to ABRC-ESOP at 12:34:53 PM 3/7/2007
The Role of The Board in an ESOP

One of the most common problems we see in smaller S. Corp. ESOPs is the lack of understanding of traditional corporate structure, in particular, the role of the Board of Directors. In most small corporations, the owners wear multiple hats and fulfill multiple roles. They are the Shareholder, the Chairman of the Board or a Board Member, and often the President of the corporation.
Who are the Board of Directors?
The Board of Directors (Board) is the highest governing body in a company. They sit between the shareholders and the CEO/President by representing the shareholders. The Board ensures the company is run in a prudent manner in the best interest of shareholders as a whole. The Employee Stock Ownership Plan (ESOP) does not have a direct relationship with management and is the only shareholder in a 100% owned the ESOP. The ESOP does not have a direct relationship with management and votes the ESOP shares elect Board members and other shareholder ballot measures.

ESOP Solutions

2007-02-22T14:56:00.000-08:00

There is a famous old joke:

"The only mistake I ever made --- was when I thought I had made a mistake --- but, I really hadn't."

If you have an ESOP long enough, despite your best efforts, you will make a mistake in its operation. While the focus should always be on running your ESOP plan properly and trying to prevent mistakes, one should also try to rectify any mistakes as soon as possible.

Following is a recipe for resolving operational mistakes in your ESOP. It is important to understand that these are not mistakes in design, but in operations.

Anyone involved with ESOP Plans can attest to the fact that errors happen. They just do, no matter how good your service providers are. No matter how experienced your staff is; errors do happen. The bad news is that practically any error has the potential to cause a plan disqualification. Fortunately, the IRS has recognized this and established a group of formal programs under EPCRS for ESOP Companies to voluntarily correct their ESOP Plan failures and avoid disqualification.
One of the most beneficial of these programs for ESOP's is this self correction program (SCP). It allows the employer to fix the failures without involving the IRS. There are no fees or penalties, and you are not required to submit anything to the IRS. Only operational errors can be fixed under SCP. These are errors that happen because of how the Plan was run in its operation. In other words, the document itself meets all requirements; there was an error in the execution of the ESOP (i.e. operations inconsistent with the Plan terms).
Practices and procedures must have been established and followed and the failure occurred due to an oversight or a mistake in applying them, or due to an inadequacy in the procedures.
If the error is "significant" the ESOP Plan Sponsor must have received a favorable IRS determination letter with respect to the Plans “tax qualified status”. Significant operational errors must be fixed within two years after the end of the plan year in which the operational failure occurred.
Insignificant operational errors can be fixed at any time, no matter how old. Insignificant operational errors can even be fixed during an IRS examination.
The IRS uses a list of factors to determine if an error is considered significant or insignificant (e.g. whether other errors have occurred, number of years involved, number of participants involved and percentage of plan assets involved, etc.).

Bad Budget News a Plus For ESOPs

2007-01-12T07:01:00.000-08:00

U.S. Comptroller General David Walker gave the Senate Budget Committee grim budgetary news Thursday. The government's total liabilities and commitments for social insurance programs now total $ 50 trillion , about four (4) times the total economic output of the United States.
This is up from about $ 20 trillion, a more than two (2) fold increase since the year 2000.

ESOPs are a major tool devised to control this looming crisis through its ability to help privatize small business retirement.

ESOP Performance: 2005 vs 2004

2006-12-06T09:41:00.000-08:00

As reported by the Employee Ownership Foundation annual survey of ESOP companies:

78% a increase in performance compared to the previous year
9% indicated a nearly identical performance
13% indicated a worse performance
85% indicated that revenue increased; 15% reported a decrease
77% indicated that profitability increased; 23% indicated that it did not increase
68% of respondents indicated that the ESOP improved the overall productivity of the company's employees

ESOP Companies Outperform Dow Jones

2006-12-05T08:44:00.000-08:00

As reported in the "ESOP Report", results from the 2006 Employee Ownership Foundation Survey indicate that 72% of ESOP companies that responded to the survey indicated they outperformed three major stock indices including the Dow Jones Industrial Average, the NASDAQ Composite and the S&P 500. At least 10% stated they outperformed at least one index, and 9% said they performed worse than all three indexes.

91% of Companies State ESOPs are Good Business

2006-12-04T08:54:00.000-08:00

ESOP Survey Reveals Overwhelmingly Positive Results

Recently released results from the Employee Ownership Foundation's 15th annual ESOP Economic Performance Survey prove that the decision to become an ESOP means better company performance and greater wealth creation for ESOP participants.

In 2006, 91% of respondents declared that creating an ESOP was "a good business decision that has helped the company." This is the highest response in the 15 years the survey has bee conducted. (source: ESOP Association)

ESOP Valuation Methods

2006-11-29T09:39:00.000-08:00

How can I determine what my company is worth? Business valuation and the method used to determine that number is the most common question I get from owners contemplating selling to an ESOP.

There are three primary valuation methods:

Comparable Method: This is where the appraiser looks at companies that are similar to the selling company to determine a price. This is similar to realestate comps in the housing market. While this may work for larger companies, it is usually not effective for smaller companies, as the data necessary for such comparisons is not available to the public.

Income Method: The Income Method is preferred when comparables are not available. Its primary focus is to look at the cash flow of the company vs. the inherent risks and determine a value based on that relationship. This is particularly well suited to service-based companies that do not have substantial tangible assets.

Asset Method: Asset based valuations should always be looked at as part of the process, but are rarely used in ESOP stock transactions. It is more common in sales that don't involve company stock.

A well done ESOP appraisal should use all the above three methods. However, the weight given to each method is a function of the ESOP appraiser's judgment.

ESOP Fiduciary Responsibilities

2006-11-21T14:19:00.000-08:00

One of the most confusing areas regarding ESOPs are the rules regarding Fiduciary Responsibility. In fact, this is one of the most common questions I receive during the conferences I speak at.

An ERISA Fiduciary (trustee) Must Act:

Solely in the interests of the ESOP plan participants
With care, skill and prudence that a prudent person familiar with such matters would use under the same circumstances (the prudent man rule)
In accordance with the terms of the plan documents insofar as they are consistent with ERISA law.

However, Board actions that affect the Company's operation and assets (even in a 100% ESOP-owned company are not subject to the above standards.

Promote How Employees Can Effect Stock Value in an ESOP Company

2006-11-17T10:51:00.000-08:00

One question that comes up regularly at employee meetings I've attended has to do with how employees can make a positive impact on the stock value of their company.

In ESOP companies, the company stock must be appraised every year by an independent valuation expert to determine the "fair market value" of the stock.

The methods that the appraiser uses can be complex, but the logic is simple: What would someone pay for a share of stock in the company? Some factors can be influenced by employees and some can not.

WHAT FACTORS WILL AFFECT STOCK VALUE IN AN ESOP COMPANY?

Taking On New Company Debt :

We know that taking out a loan will have a negative impact on the value of an ESOP company. Much like a home mortgage, the asset is worth less until you build up equity by repaying the loan. While the typical employee of an ESOP company will not make strategic decisions to repay debt, they can help generate the cash needed to make the loan repayments to build the value up.
S Corporation Status:

As a 100% ESOP-owned company that has elected S Corp. tax status - the company will not pay taxes on any of the profits earned. Those former tax dollars can be reinvested to grow the business. The performance of all employees on the job can multiply the advantage of this tax status.
Productive Use of Time:

Avoiding rework, starting on time, having the right people do the right jobs, and doing the job more efficiently can have a powerful impact on the stock value in an ESOP company.
Safety:

Safety is something that employees have much more control over than ESOP company leaders - and it can have a tremendous impact on the stock value of an ESOP company. By following safety procedures, an ESOP company can avoid the cost of accidents and non-productive time.

ESOPs Provide WHAT Employees Want

2006-11-15T07:55:00.000-08:00

ESOP companies long ago learned what many companies are just now learning; you can offer all the benefits in the world, but the one that matters most to employees is a piece of the action. Of the 18 honorees in Winning Workplaces' fourth annual Best Bosses competition, 14 run companies partly or completely worker-owned. That reflects a broader trend. The National Center for Employee Ownership estimates that 9,225 U.S. companies are offering stock-option plans, stock bonus plans, and profit-sharing plans as of July, up from 7,600 in 1999.

ESOPs are a very economical way to provide this benefit to employees as well as provide growth opportunities for the sponsoring company.

This year, Winning Workplaces has teamed with the Wall Street Journal's new "Startup Journal" to solicit nominations for "Winning Workplaces 2007." If you are an ESOP company, you can nominate your own company or submit a nomination for a company you think is deserving. To complete the nomination form, visit http://www.winningworkplaces.org/bestbossesaward/howtoapply.php.

Companies with ESOPs Perform Better

2006-11-11T12:40:00.000-08:00

Companies that adopt Employee Stock Ownership Plans (ESOPs) outpace industry peers in financial performance, according to a study.

Hewitt Associates, in conjunction with the Northwestern University's Kellogg graduate School of Management, analyzed all 382 publicly-traded U.S. companies that adopted ESOPs from the early 1970's to the early 90's.

In total shareholder return, those companies outperformed peers without such plans by a cumulative 6.9% percentage points in the four years after the ESOP was adopted. In return on assets, the difference was 2.7% annually.

Hewitt attributed the improved performance to the "ownership dynamic," in which employees feel a financial and psychological benefit to participating in ESOPs. 82% of company executives said their ESOPs had a positive effect on business results.

ESOP Installation Strategies

2006-10-11T08:51:00.000-07:00

There are many different reasons business owners install ESOPs in their companies. Until 1998, ESOPs were only available to C-Corporations, both public and private. In 1998 they also became available to S-corporations.

In public corporations (C-Corps) they were used primarily as a way to provide deductible non-cash benefits to employees or in exchange for employee concessions (wage, benefit, etc).
In smaller private C-Corporations they were primarily used as an exit strategy for a retiring shareholder that otherwise had no market for their company. There is a tax advantage available to both the seller and company. The company is able to deduct payments on the purchase price from corporate earnings and the seller can reinvest the proceeds and receive a tax deferral under certain circumstances.
While this allowed for a deduction of the purchase price for the company, it can still create a cash flow challenge for the company, as all other taxes are still due on earnings other than those related to the payment.
In 1998 it became possible to install an ESOP in an S-Corporation. This revolutionized the ESOP world in that the structure of an S-corporation allowed for the opportunity to eliminate income taxes on all corporate earnings, not just those related to the purchase of the company. The excess tax savings can then be retained in the company.

In recent ESOP conferences I have attended, an unscientific poll (raise of hands) was conducted to determine how many of the companies present were S-Corporations ESOPs (75%). Of those, how many were structured to be 100% tax exempt, again 75%. The last question was how many had made an acquisition of another company or were in the process of doing so in the last 18 months. The response was a surprising 50%.

The creation of the S-Corporation ESOP has changed the landscape of the ESOP world and are beginning to impact other non-ESOP companies.

We will be exploring these and other related issues in future postings.

If you are an ESOP company, did you do it for the purpose of acquisition, exit, growth , recruiting or other?

ESOP Employee Communication

2006-10-02T07:07:00.000-07:00

Over the next week or so we will be discussing the importance of communicating the ESOP and its benefits to employees, along with some tips on how to get your message across.