A plan that lets your employees own stock in your company comes with many benefits. But setting up an employee stock ownership plan is a complex process involving a myriad of costs that can add up.
The benefits of enabling employees to buy partial ownership of your business include creating tax benefits, reducing workforce turnover, opening up an exit strategy, and a host of other advantages. But the cost to do so can be at least $20,000. The following covers the steps you need to take and how much each costs.
The first step in setting up an ESOP is to find out whether it is even feasible. Companies as small as 20 employees may be candidates for ESOPs. However, many questions need to be answered before plunging into this lengthy and expensive process. The most basic is whether the owners of the business stock are willing to sell. Others include whether your company’s cash flow will support the financial requirements of the plan.
You can hire an accountant specializing in feasibility studies to do the more technical aspects of this if necessary. The amount will vary widely from no out-of-pocket outlay, if you use internal resources, to several thousand dollars if you contract it all out.
Next you need to find out how much your company is worth. For a public company, this is simply a matter of examining its worth as decided by the public markets. Private companies must hire a valuation consultant. A comprehensive valuation for an ESOP is likely to cost approximately $10,000. This amount may be increased by $2,000 or more to pay for issuing fairness opinions, which are documents stating that the ESOP is paying a fair amount for the shares it is purchasing.
Legal fees often represent the bulk of the cost of setting up an ESOP. They range widely, from a low of $10,000 to as high as $100,000. Much depends on whether you pay the ESOP attorney to perform tasks that your company employees would do for much less. For instance, you should put in plenty of work before you meet with your attorneys, discussing and deciding the purpose of your plan and as many other details as possible.
The ESOP legal team is responsible for preparing plan documents such as trust agreements, review of the plan’s design for legal flaws, and other tasks. These may include representing the ESOP in the event of an audit by tax or labor authorities.
Obtaining the cash to purchase shares in the company is another expensive part of the process. Typically this is done through a loan, and because of the size of the transaction (several hundred thousand dollars is a smallish ESOP loan) there will be many fees for legal opinions, loan document preparation, and loan commitment fees. Around $10,000 should cover this portion of the deal, unless you need to hire a financial consultant to structure a transaction involving multiple financing sources, for instance. This may add another amount equal to 1 percent to 3 percent of the size of the transaction.
The first year will involve some ongoing annual costs for tasks such as record keeping, distributing participant account statements, and keeping up with regulatory filings. Expect to pay from $30 to $60 per employee, with larger firms paying less per worker, plus $2,000 and up in annual continuing administration costs.
Mark Henricks writes about business, technology, personal finance, and other topics. His work has appeared in The Wall Street Journal, Entrepreneur, the Washington Post, and other leading publications.