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Is an ESOP the Right Transfer Strategy for Your Private Company?

Nicholas W. Ward, CPA
Nicholas W. Ward, CPA Director, Audit & Accounting
Alyssa Brady
Alyssa Brady Senior Accountant, Tax Strategies

We recently co-hosted an ESOP roundtable discussion with SES ESOP Strategies. There has been a significant increase in the number of private company owners considering an ESOP as a transfer strategy, so we came together to discuss a range of topics including ESOP basics, the advantages and challenges associated with ESOPs, and insights and takeaways from CFOs at companies with established ESOPs.

Mario Vicari, Director of Kreischer Miller’s ESOP group, and Jim Steiker, Chairman of SES ESOP Strategies, moderated the roundtable, which included a panel. The panelists were Andrew Berger, Director in Kreischer Miller’s Tax Strategies Group, Steve Feimster, Director in Kreischer Miller’s Audit and Accounting Group, Sean-Tamba Matthew, Attorney at SES ESOP Strategies, and Vince Capone, Vice President at SES ESOP Strategies.  

The audience consisted of private company business owners, CEOs, CFOs, and others in accounting roles eager to share their successes and challenges as an ESOP or learn whether becoming an ESOP may be right for their company.  

We began by discussing the three stages of an ESOP lifecycle:

  1. The transaction phase: Identifying how an ESOP will fit into an owner’s transition strategy as well as determining the transaction structure and financing
  2. The deleveraging phase: The multi-year process of repaying the company’s debt obligation it incurred to finance the ESOP transaction, while allocating stock to ESOP participants
  3. The mature phase: Proactively planning and managing the value of the company’s equity in employees’ accounts, which is called the repurchase obligation

CFOs from companies with established ESOPs then provided insight to those debating taking the leap into the transaction phase. They shared how companies can continue working toward their goals while succession planning, rather than selling to a new owner or private equity firm.

Once companies complete their ESOP transaction, they oftentimes see a positive change in employee morale. ESOPs enhance your company’s benefit package, and giving a share of the ownership to employees helps attract and keep talent. Additionally, ESOPs are corporations that are federally tax-exempt, and instead of paying the IRS, you can provide liquidity back into the company and to employees.

One challenge that a lot of ESOPs face is the need for the company to be profitable to make it through the deleveraging phase. To mitigate risk of failing to pay the creditors from the ESOP transaction, companies usually choose to start small, with the ESOP owning a smaller percentage of the company. It’s also important for companies to forecast profits and budgets prior to entering the transaction phase. The forecasts required are typically three years and the panelists stressed that it’s important to ensure the share price is realistic and the information provided to the appraiser is both timely and accurate.

The most important takeaway from the roundtable discussion was the need to engage professionals that understand the ins and out of ESOPs. These include accountants, advisors, attorneys, valuation experts, and bankers. Those considering forming an ESOP, along with those who already have one established, need to have the right people advising them as they move through the ESOP lifecycle. Lenders that understand the inner workings of an ESOP are crucial in helping a company with its financial needs. Reputable valuation companies are just as important in their role in determining a valid share price. Finally, engaging competent accounting, tax, and legal professionals and advisors is vital in maintaining a viable ESOP that conforms with all the necessary accounting and tax rules as well as Department of Labor requirements.

If you would like to continue this discussion – whether you are determining if an ESOP if right for your company or you’re an established ESOP looking for help managing the process – please contact us or click here for more information about our ESOP services.


Information contained in this alert should not be construed as the rendering of specific accounting, tax, or other advice. Material may become outdated and anyone using this should research and update to ensure accuracy. In no event will the publisher be liable for any damages, direct, indirect, or consequential, claimed to result from use of the material contained in this alert. Readers are encouraged to consult with their advisors before making any decisions.

Contact the Authors

Nicholas W. Ward, CPA

Nicholas W. Ward, CPA

Director, Audit & Accounting

ESOPs Specialist

Alyssa Brady

Alyssa Brady

Senior Accountant, Tax Strategies

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