Factors of Design
ESOP Plan Governance ~ Plan Anniversary Dates
Repurchase Obligation ~ Share Recycle vs Redeem
Special Diversification Rule ~ Distribution Policy
Coordination of specialty Service Providers
There is an army of service providers that must be considered to complete the initial transaction, as well as maintenance and preservation of the plan.
Legal
Attorney for ESOP plan documentation, ongoing compliance,
and general corporate counsel.
Trustee
Manage the assets and voting shares of the ESOP plan.
Accountant/Auditor
Annual corporate review or audit.
Assessment and Valuation
Initial transaction and annual valuation.
Third Party Administrator (TPA)
ESOP plan administration.
Insurance
Employment Practices, D&O, Fiduciary Liability, and Fidelity Bonding.
Implementation - Steps in Forming an ESOP
Typical initial transaction may take 7-10 months to complete. Depending on company objectives, steps may vary.
- Explore if the owner is ready to sell; owner amendable.
- Explore employee potential to buy-in and understand the plan benefits.
- Feasibility study and pre-valuation to see if company can sustain the plan and manage the debt obligation.
- Select ESOP plan attorney; corporate attorney.
- Appoint trustee.
- Conduct valuation.
- Secure funding structure.
- Construct ESOP operational plan.
- Pre-ESOP employee communication.
- The transaction.
Following the initial steps of the transaction, the company uses tax-deductible contributions, dividends, or distributions to repay the loan. The shares are held in suspense in the trust and released to the participants as more payments are made.
Annual procedures are required through the infinite life of the plan.
- Rally new employees.
- Establish ESOP Committee.
- Annual audit.
- Annual plan testing.
- Annual valuation and share price determination.
- Annual allocation process and statements to plan owners.
- Participant distributions.
- Consideration of special regulations.