The Process of Setting Up an ESOP

January 23, 2024

Are you considering an employee ownership strategy? Do you have questions about establishing an ESOP within your business? Today’s article breaks down the primary steps for setting up an Employee Stock Ownership Plan (ESOP) at your organization. 

Preliminary Actions for ESOP Launch

Step 1: Educate Owners on ESOPs

The first step to launching an ESOP is to have internal discussions with all the organization’s owners, to see if this is a solution they are interested in pursuing. There are many benefits to establishing an ESOP, so even if there are owners with limited knowledge about ESOPs in the beginning, it’s worthwhile to spend time educating them and providing resources 

Step 2: Conduct a Feasibility Study

A feasibility study objectively analyzes how creating an ESOP will affect employees and the business' bottom line. These studies are often conducted in-house but can also be managed by an outside consultant. A feasibility study for an ESOP should include a look at the financials, to make sure an ESOP is possible, as well as interviews with affected personnel and owners. 

Step 3: Complete a Valuation

During the valuation phase, an independent and experienced advisor, overseen by the ESOP trustee, conducts an in-depth analysis of the company’s financial and operational health. It’s important to choose an external party to complete the valuation, because the fiduciary regulations and responsibilities of are extensive, and an objective third party will provide the best legal option. 

At Aegis, we use a fiduciary committee consisting of attorneys, a CPA, and an accredited valuation advisor. These individuals work together to perform due diligence with an independent financial advisor to make valuation decisions.

Compliance with Legal and Regulatory Standards

Step 4: Design Your ESOP Plan with an Attorney

The U.S. Department of Labor has strict legal requirements for ESOPs, so an attorney who specializes in ESOPs will help the company navigate the legal procedures and complexities of designing an ESOP plan. This attorney conducts due diligence, presents options for ESOP transaction structures, designs the benefit features of the plan, and prepares the financial and legal documents to establish the ESOP. Ultimately, the attorney’s objective is to minimize risk exposure and maximize business objectives.

Step 5: Fund the ESOP

An ESOP is typically funded by a bank or private parties. Other funding options are available and can be discussed with your ESOP advisor. 

Continuous Oversight and Adaptation

Step 6: Establish a Process to Operate the Plan

Most companies hire an ongoing trustee like Aegis to act as the plan's fiduciary. This ESOP trustee has legal ownership of the company stock and must always act in the best interests of the plan participants and beneficiaries. The trustee’s job is to protect participants and improve the ESOP.

Step 7: Communicate the ESOP to Employee Owners

While employees may have been made aware of the ESOP process along the way, once it has been set up and running, formal communications within the company can take place. There can also be town halls and internal discussions to field questions from team members.

Step 8: Communicate the ESOP Externally

Many companies also choose to make external announcements regarding the ESOP, to generate some positive PR and buzz about the organization and its work. ESOPs should communicate to vendors, customers, and the greater community about this new structure. This step is important, yet often missed by ESOPs. External audiences view becoming an ESOP as a very positive step, so companies can update their branding to include their new ownership structure, update their website, and talk to media outlets. 

At Aegis, We Believe in the Power of ESOPs

Establishing an ESOP and putting together an employee ownership strategy is an exciting time for a business. ESOPs have transformative power, not only for business owners and employee owners but also for the greater community. 

If you’re looking for a more in-depth resource about ESOPs, we recommend “Understanding ESOPs” by Corey Rosen and Scott Rodrick and the National Center for Employee Ownership. 

At Aegis, we wholeheartedly believe in the benefits of ESOPs and their potential to create more prosperous and equitable businesses. Reach out today for more information about our services. 

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DISCLAIMER: The Articles displayed on this website do not constitute legal advice, nor do they substitute for the advice of qualified professionals. While the Articles displayed on this website are designed to provide information regarding the subject matter covered, we cannot guarantee the accuracy of any statements contained therein. If any legal advice or expert assistance is required, the services of qualified professionals should be sought.

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