Creating an ESOP typically takes anywhere from six to nine months. Some plans have been set up in several weeks, while others can take as long as two years. Setting up an ESOP will follow these basic steps:
- Valuation: A valuation is needed for all privately held firms and, in some transactions, publicly traded companies. An ESOP valuation process is when the Fair Market Value of a company’s ESOP shares is determined. Depending on cooperation and recordkeeping, the process can take as little as a month.
- Feasibility Assessment: A feasibility assessment must be done, even if just one done in-house. This assessment will analyze how creating an ESOP will affect employees and the business bottom line.
- Present to Lenders: Numbers are collected from both the valuation and the feasibility assessment and presented to lenders, who will create a financial deal structure to negotiate with buyer (trustees) and seller.
- Legal Council: Before ESOP plans are finalized, legal council should be sought to insure compliance with the Employee Retirement Income Security Act and the U.S. Department of Labor.
- Finalize plan and Implement: The final plan documents must be drawn up and a trust agreement created detailing the duties and responsibilities of ESOP trustees.
The time it takes to set up an ESOP is dependent upon several factors, including:
- The company’s complexity and size
- The availability and cooperation of various practitioners
- How quickly the company can make decisions
- How readily available good company information is
- The agreeability of lenders
Good record and book keeping, quick decision making, and cooperation will streamline and expedite the process of setting up your company’s ESOP.
Additionally, a repurchase obligation study should be performed. Although it can be done after the ESOP transaction and not a requirement to put the plan in place, it is better to do this study before and use the results as part of the plan design.
Additional Considerations for Setting up an ESOP
When looking into how to set up an ESOP, a business may encounter additional delays if equity investors are needed. It takes time to find investors, develop models for pricing investment, and, in some cases, arranging investments.
These complex transactions often require a fairness opinion and/or a solvent opinion. A fairness opinion assesses the relative pricing of different investments in the transactions and the fairness of the transaction for plan participants. Solvency opinions determine for the lender if the company can repay the debt and remain solvent.
Possible employee concessions or new labor negotiations, should be taken into consideration when determining how long it takes to create an ESOP. In public companies, some ESOPs may require additional filings with the SEC or the stock exchange on which the company is listed.
How long does it take to set up a non-leveraged ESOP?
A Non-leveraged ESOP can be set up relatively quickly. These ESOPs only require plan and trust documents to be drawn up and a valuation to be performed. The comments on repurchase studies in the question “How long does it take to set up a leveraged ESOP?” apply here as well.
How long does it take to set up a stock options program?
A stock option program can be set up very quickly if practitioners are able to schedule properly. In the same manner as other valuations and plans, such as 401(k)s, hasty designs are often poor ones. Take the time with your company to think things through carefully.
How long will it take to set up an ESOP for my business?
Your business is unique! Its ESOP will be unique. Reach out to Aegis to learn specifically what it will take to create and ESOP for your company.