Esop Stock Acquisitions: An Introduction

As your business looks to the future, you may consider several options during the estate planning process: continuing private ownership by an individual or individuals, sale to an insider, sale to a third-party investor, or sale to investors. Company employees by developing employee actions. Ownership Plan (“ESOP”).

The purpose of this document is to explain some of the options for transferring shares from current owners to employees through an ESOP. The various methods for structuring a stock transfer discussed here are:

• Leveraged selling;
• Vendor financed sale; and
• Annual installment sale / ESOP purchase.

The examples in this document assume (1) that an ESOP will be established during the current year; (2) that your Company has a 401 (k) plan that will remain in effect; and (3) the ESOP trustee will be a group of employees approved by the Company’s Board of Directors.

When reviewing these options, keep in mind that they do not have to be exclusive to each other; you can combine one or more of the ESOP options into your ownership transition structure.


This ESOP share acquisition method requires the Company to borrow funds from a bank to facilitate the ESOP share acquisition transaction (assuming the Company does not have the necessary cash reserves available to self-finance the transaction). The Company, in turn, would lend the funds to the newly formed ESOP. The ESOP would use 100% of the funds it borrowed from the Company to purchase a block of shares from the Shareholders. A leveraged sale requires that the block of shares purchased by the ESOP be valued on the single date it is purchased.

Allocation of shares in a leveraged ESOP: In the case of a leveraged ESOP, the shares are considered unallocated and are held in a temporary account until the trustee makes loan payments to the Company. In this example, the loan is repaid over a 10-year period, whereby one-tenth of the total shares are “allocated” to participants’ accounts each year.


This method of acquiring ESOP shares requires Selling Shareholders to act as funders of ESOP, rather than a bank (or using the Company’s cash reserves). In this scenario, each selling shareholder would receive a promissory note (collectively the “ESOP notes”) from the ESOP in exchange for shares. Generally, the Company would guarantee payment of the ESOP Notes by the ESOP, and Selling Shareholders would generally receive installation sale treatment for payments due under the ESOP Notes.

This income tax treatment provides Selling Shareholders with the ability to recognize capital gains as payments are received each year during the term of the ESOP Notes, rather than realizing the full amount of capital gains received. of the ESOP on the date of the sale of shares. to ESOP.

Seller financing can be combined, and is often combined with bank leverage and / or an annual installment sale to provide selling shareholders with a cash down payment at closing of a seller-financed ESOP share purchase. A seller-financed sale requires that the block of shares purchased by the ESOP be valued on the single date it is purchased.

Stock allocations in a seller-funded ESOP – In the case of a seller-funded ESOP, stock allocation to eligible employee accounts is done in the same way as in a leveraged ESOP


This method of acquiring ESOP shares finances the purchase of shares annually based on the cash that the ESOP has available to purchase shares each year. The Company’s annual cash contribution to the ESOP could be the annual source of ESOP cash flow for share purchases. To the extent available, S Corp’s income distribution amounts may also be used to fund the purchase of shares. This method of acquiring shares by an ESOP is less secure than the methods discussed above (and can be combined with either method, if cash flow permits) because (I) the Trustees must determine each year how many shares they can afford to buy from potential customers. Selling Shareholders; (ii) the price of the shares must be set each year from the date of each purchase of ESOP shares; and (iii) Selling Shareholders may be required by written agreement to offer the Trustee the opportunity to purchase a specified number of shares or percentage of their holdings of shares on or around a specified date, but the Trustee does not You may be required to purchase the stock in advance. This method provides the Selling Shareholders with a potential fluctuation (+/-) in the sale price of the shares due to the Trustee’s obligations to pay the Selling Shareholders the fair market value of the shares on the date of each purchase of the shares. ESOP. The valuation of the shares of the Selling Shareholders that are offered for sale to the ESOP under this method is a key element of planning because the ESOP may be acquiring a majority stake in the Company over time and the Selling Shareholders seek to be offset by your shares at an interest value at the beginning of your share sale to the ESOP.

Allocation of shares in an annual installment sale ESOP: In the case of an annual installment sale ESOP, the ESOP purchases the shares as cash becomes available. Therefore, the number of shares acquired each year may vary. Selling Shareholders continue to own the shares until they are purchased by the ESOP. This arrangement is more flexible than a traditional leveraged or seller-financed arrangement, but such flexibility increases the ESOP’s annual administrative costs, because each annual installment sale to the ESOP will require (1) the Trustee to receive an opinion from its financial advisor from than the trans. – the share complies with certain ERISA standards, and (2) the preparation of separate legal documentation coinciding with each of the actual purchases of ESOP shares.

If you have questions about business succession planning, employee stock ownership plans, or other corporate matters, please feel free to contact Adam S. Tracy Esq at (888) 978-9901

Interested parties are also encouraged to visit the company’s recently revamped website at to learn more about the full range of services the company offers.

About Securities Compliance Group, Ltd.

Securities Compliance Group, Ltd. It is a leading provider of corporate legal, corporate financial, bankruptcy and securities services for the micro, small and medium public and provides entities, their management and shareholders. Our team is comprised of trained and experienced entrepreneurial attorneys, capital market professionals, and certified public accountants. Representing hundreds of pre-IPO, NASDAQ, OTC, Pink Sheet and other publicly traded companies, Securities Compliance Group offers robust legal and compliance solutions to its clients around the world.

Leave a Reply

Your email address will not be published. Required fields are marked *