An attorney with more than 25 years of experience with employee stock ownership plans talks about how they are established and how they operate.
Sometimes business owners who are ready to retire decide to sell their company to the employees who helped make it a success.
One way that happens is through an employee stock ownership plan, or ESOP.
Steve Eide, an attorney with Gray Plant Mooty in Minneapolis, has advised businesses on how to set up and run ESOPs, a process that can involve changes in the corporate structure.
His clients include Border States Electric, a Fargo-based electrical supplier, and Walman Optical Co., based in Minneapolis, both ESOPs.
He talked recently to the Star Tribune.
Q: If a business owner wants to sell to employees using an ESOP, must they come up with money to buy the company?
A: No. The employees are not paying anything to acquire an interest in the company. The ESOP usually borrows the funds to buy the stock. The debt is paid off over time with contributions that the company makes to the ESOP each year.
Q: Business owners might get more money selling to a competitor. Why sell to an ESOP instead?
A: They may like the flexibility of selling to an ESOP, where they can sell maybe 30-40 percent of their stock and stay involved with the company, and five or 10 years later sell the rest. There’s a greater chance all the employees will retain their jobs and the business will remain in the community where it was founded.
Q: In an ESOP, what control do employees have?
A: Employees don’t have direct control over who is going to manage the company. The governance of an ESOP company is similar to any other privately held company. The difference is that ESOP shares are held by the trustee of the plan, who is subject to federal pension laws and must act in the best interest of the participants when voting for the board of directors, for example. Employees do have direct voting rights on major corporate events like a merger or selling off assets of the company.
Q: What happens when a business owner is thinking of setting up an ESOP?
A: There is an education process at the beginning to make sure the owner understands what an ESOP is and the legal requirements that come with it. Then we go through a feasibility analysis where we determine if the company is a suitable candidate to be an ESOP company.
Q: What factors are favorable to creating an ESOP?