Feasibility studies help avoid ESOP foibles.

• Author: Bonn, Karen
• Position: Employee stock ownership plans

Companies consider employee stock ownership plans (ESOPs) for a variety of reasons, which often includes purchasing shares from retiring owners, owners without heirs or owners with estate-planning concerns. Companies also use ESOPs to boost employee morale and reduce turnover. No matter the reason for considering an ESOP, companies must address a range of issues: Can the company afford to purchase the stock from selling shareholders? How significant will the ESOP contributions be each year? Will the ESOP provide adequate benefits to employees? If the ESOP is the primary benefit plan, how does it compare to other available benefit plans?

There are many complex issues that determine whether an ESOP is feasible. Companies and owners considering an ESOP often commission an ESOP feasibility study to give them the insight they need to make an appropriate decision. Such a study combines input from shareholders, company management, legal counsel, accountants, valuation professionals, trustees and benefits consultants, to give all parties involved a detailed understanding of the pros and cons of their ESOP options.

The first step in determining an ESOP'S feasibility is to develop a clear understanding of the goals of the major parties in the ESOP transaction. The parties might include the management team, employees, shareholders selling and not selling, and even lenders providing capital for the transaction. To accurately define these goals, parties to the transaction should determine the amount of stock to be purchased, the number of plan participants, the company's debt-carrying capacity for a leveraged ESOP, plan provisions, voting rights and the trustee selection process.

Maintaining Management Continuity

Long-term corporate plans and the potential effect of shareholders' departures and sales of their interests are key issues. Many companies are dependent on the skills, contacts and reputations of their principals. A feasibility analysis should consider how much stock shareholders wish to sell and over what period of time. It should determine if selling shareholders plan to remain with the company. If not, the company should plan for future managers to develop their own independent authority before the principals leave completely.

A basic estimate of the value of the owners' shares is fundamental to any ESOP feasibility discussion. Share value determines whether the ESOP transaction will be attractive to potential sellers and whether the company...