Ten Steps to a Successful ESOP

Employee Stock Ownership Plans (“ESOPs”) are federally qualified employee benefit programs governed by U.S. law. Since our president and founder, John Menke, wrote some of the original ESOP legislation in 1974, more than 25 additional laws have been passed to promote and broaden the benefits of ESOPs. In general, ESOPs offer owners of companies tax efficient means to sell all or part of their shares to their employees, on a timeline of their choosing. ESOPs have the added benefit of energizing employees to increase sales and profits as these employees become “owners.” Shares sold to an ESOP are held in a trust: the employees receive beneficial ownership, while and in most instances the selling shareholder retains control. The formation of an ESOP does not preclude the company from going public or being sold at a later date. Below are ten steps to understanding, designing and implementing an ESOP that is ... Read More..

The Perfect Solution to the Perfect Storm: How an SR ESOP Can Be Used to Save Your Business from Bankruptcy

A “perfect storm” has hit the U.S. economy and its privately-held businesses. Consumer purchasing power has dried up, resulting in reduced revenues for almost all privately-held businesses. At the same time most banks have stopped or curtailed lending, and bank credit is no longer available to many businesses. During the past two quarters many businesses have downsized their operations and have implemented reductions-in-force, yet they are still faced with negative cash flows. Fortunately, there is a perfect solution to the negative cash flow problem that many businesses will experience for the rest of this year and most of next year. That solution utilizes a well-known tool that has been part of the tax code for over 35 years. It is a tool that is relatively inexpensive to implement and does not require the use of outside lenders or expensive factoring companies. The solution is to implement a Salary Reduction Employee ... Read More..

ESOP Marketability Discounts: Is the "Put Option" Argument Fallacious?

Virtually every ESOP appraisal that has been written in the past 10 years has concluded that, both in the case of purchases of company stock by an ESOP from direct shareholders and in the case of subsequent distributions and repurchases of company stock to and from plan participants, the discount for lack of marketability is greatly diminished by virtue of the ESOP “put option.” This article reviews the origin and development of the put option argument in the appraisal literature and concludes that (1) the put option argument is fallacious with respect to purchases of company stock from direct shareholders and (2) nevertheless, there should be no marketability discount with respect to purchases of company stock from direct shareholders. The issue of marketability discounts in ESOP transactions is an issue that has been crying out for clarification ever since the Eyler case was decided by the Tax Court in 1995 ... Read More..

Why Selling To An ESOP Gives Better Financial Returns vs. Other Options

You own a successful privately-held business which you may be thinking about selling. Very likely your business is your most important financial asset. You want maximum financial advantage when you sell, of course, but there are other concerns. For example, how will the sale affect your key employees? Will your firm continue as an independent entity or will it be absorbed into the buyer’s operations? If there are minority shareholders, how do you deal with them? ... Read More..

Exit Strategies

The exit strategies available to owners of electrical wholesaling firms are somewhat limited. The available strategies include selling the business to a competitor, selling the business to the management employees, or selling the business to all of its employees under the provisions of an Employee Stock Ownership Plan (“ESOP”). ... Read More..

22 ESOP Myths And Misconceptions

Click here to download the full article in pdf format ESOPs were first authorized by federal legislation in 1974. Since that date, there have been more than 25 separate pieces of legislation that have further defined what an ESOP is and what an ESOP is permitted to do. Despite this fact, there are more misconceptions about ESOPs than about any of the other similar financial tools that exist in the marketplace. The following describes some of the more prevalent myths and misconceptions regarding ESOPs. Hopefully, the explanations provided below will help to dispel many of the misconceptions that currently exist regarding these matters. Misconception # 1 ESOPs can only be adopted by regular C corporations False. More than half of all new ESOPs are installed by S corporations. Originally, ESOPs could only be adopted by regular C corporations. However, as a result of legislation in 1996, ESOPs can now also ... Read More..

An Open Letter to Business Owners

Dear Business Owner, Would you be interested in selling part or all of your stock in your company if you could sell it for more than twice what it is currently worth? Case Study I: The Benefits of a Gradual Sale to an ESOP We recently helped one of our clients do just that. Company X is a successful home health care company whose sales and profits have been growing at 15% per annum. The owner recently turned down an offer to sell his entire company for $6 million. Instead of selling the entire company now, we structured a transaction whereby the owner will sell 10% of his stock each year to an ESOP over the next ten years. As a result of selling his stock on a year-by-year basis at increasing prices each year, the owner of this company will ultimately receive over $14 million dollars for his stock. This ... Read More..

Why Should You Consider an ESOP?

Dear Reader: As president of Menke & Associates, Inc., I believe there is significant untapped growth potential in most privately held companies. Whether you want to sell some or all of your stock in the company in the next five years or whether you plan to remain active for the long term, Menke & Associates, Inc. proposes to work with you to develop a program which should help you achieve your growth potential and multiply the total value of your investment in the company. Our experience with more than 2,000 companies nationwide since 1974 proves to us that only on-site, hands-on owners consistently tap the energy, unlock the ingenuity, and muster the commitment necessary to make a business successful. After all, who cares whether the business succeeds or fails? Only owners really care. Over the past 35 years more than 40,000 U.S. company owners have taken advantage of this opportunity ... Read More..

The Origin and History of the ESOP and Its Future Role as a Business Succession Tool

The First ESOP (1956) San Francisco lawyer and economist Louis O. Kelso created the first employee stock ownership plan (ESOP) in 1956 as a way to transition ownership of Peninsula Newspapers, Inc. from its two founders (both then in their 80s) to their chosen successors, the managers and employees. Kelso had long believed that the company’s own employees should be the logical buyers and the ultimate owners; they were the ones who made the business successful in the first place, and the ones who knew the ins and outs of the business better than anyone else in the industry. The two founders had long wanted their employees to inherit ownership. They had promised that when the time came for them to retire, the employees would have the first right of refusal. They had seen too many of their competitors gobbled up by large newspaper chains, and they had seen the ... Read More..

A Modest Proposal for a New, New Deal

Capitalism collapsed in the fall of 2008. It’s collapse was also the direct result of a flaw in the system. Capitalism promised universal opportunity and a rising tide for everyone. To achieve this result, capitalism privatized and/or deregulated every possible industry. It glorified greed, extravagant executive compensation, and financial manipulation. Just as in the case of communism, it failed to place any real purchasing power into the hands of the workers. Over the past 20 years, the economic purchasing power of U.S. workers has decreased by an alarming percentage, despite the overall growth of the U.S. economy. U.S. capitalism delayed the day of reckoning by devising a host of innovative but lethal financial tools such as subprime mortages, negative amortization loans, and credit cards and automibile loans that were issued with no questions asked. Now that the bubble has burst, the Goverment’s only solution seems to be a massive “stimulus” ... Read More..