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ESOP Services
Employee ownership has become an increasingly popular means of retaining and motivating employees. ESOPs are tax-favored devices congress created in the 1970's as a means of encouraging employee ownership of a business, thereby providing the closely held business a vehicle for continued growth and success. ESOPs are encouraged by means of various tax advantages including tax deferral for the owner selling more than 30% of the company's stock to the ESOP, and a company deduction of both the interest and principal of the ESOP loan.
The ERISA-mandated put option generates the need of most ESOP related business valuations. ERISA requires that an ESOP must provide a market for an employee's company shares upon the retirement or termination of employment. This share repurchase liability ensures that employees have some degree of liquidity to their investment and they are not forced to sell their company shares in what may otherwise be a very illiquid market. Also, if the ESOP is leveraged, the company is the ultimate source of repayment for the loan.
Before the owner and his or her advisors can realistically talk about the use of an ESOP, a valuation must first be done, as value drives everything else in the consideration and implementation of an ESOP. Having a valuation alone, however is not enough. Using various hypothetical scenarios of the share interest to be sold, LMF Valuation & Consulting will create sophisticated financial models/analysis that validate or raise questions regarding the ability of the company to repay the ESOP debt under the various capital structures assumed. This enables the client to reasonably discuss the options available and decide which one best meets the client's personal tax and estate-planning needs, while maintaining an ideal capital and risk structure for the company.
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