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Alternative Paths to an ESOP Transition

An NCEO Issue Brief

by Jim Mauch, Rick Rose, Corey Rosen, Roger Ryberg, and Stan Slabas

This is one of our archived publications; specialized publications that have been removed from our main publication list and are not being updated, but are are still available for purchase, although sometimes only in digital form.

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ESOPs are flexible instruments, and there have been many varied and sometimes creative approaches to implementing them. In this issue brief, three companies that used ESOPs in three very different ways describe the process of implementing their plans and assuring a smooth transition. In one company, the ESOP was planned over a long period, with careful preparation for the transition. In another, the owner sold over a period of years using both seller and bank financing, with synthetic equity awards to key people. In the third company, a leveraged ESOP was merged into the 401(k) plan to form a KSOP with a complicated design. In the final article, a veteran ESOP consultant places these transactions in a broader context.

Publication Details

Format: PDF, 20 pages
Dimensions: 8.5 x 11 inches
Edition: 1st (April 2012)
Status: Available for electronic delivery

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Corey Rosen

How to Start an ESOP and Keep Your Sanity
Jim Mauch
Are the Employees Ready?
Complicated Plans
ESOP Funding Decisions
Important Early Tasks
Announcing the ESOP
Critical Issues I've Learned Along the Way (and Might Do Differently Next Time)

Structuring an ESOP as a Gradual Sale
Roger Ryberg
Planning the Transition
The ESOP Transition
Management Transition and EVA
What Is EVA? (Corey Rosen)

From Crossroads to KSOP: A Successful Ownership Transition
Stan Slabas
Becoming Employee-Owned
Enter the ESOP
Communicating the ESOP
Getting the Most from the ESOP

A Practitioner's Perspective on ESOP Structures
Richard B. Rose
Uses of ESOPs
Windings, S&C Electric, and Tenmast
ESOP Trends


From "From Crossroads to KSOP: A Successful Ownership Transition"

We offered to establish an ESOP to purchase the shares so that the sellers could take advantage of the Section 1042 tax deferral. The stock that passed to the daughters from the generation-skipping trust retained its original basis from 1955, when it was placed in the trust by Nicholas Conrad. The stock's value had increased by over 1,000 times, so, as you can imagine, the potential capital gains tax on any sale by the selling daughters would be significant. Both sellers resided in high-tax states, and since their basis was negligible, the combined federal and state capital gains tax was effectively going to be about 25% of the proceeds of the sale. The potential savings from deferring the tax on the sale proceeds bridged the valuation gap between the sellers and the company.

To ensure that we didn't get sued by any other shareholder, we offered all shareholders an opportunity to sell their stock to the ESOP at the same price and terms as the proposed transaction with the Conrad daughters.

S&C borrowed from a private lender and then loaned $125 million to the ESOP to purchase what turned out to be two-thirds of the outstanding stock. Once a term sheet was agreed to, we started the next phase of our journey—designing the ESOP. This was almost as challenging as negotiating a deal.

We already had a defined benefit pension plan and a defined contribution 401(k) plan—a rather generous retirement package. Adding a third retirement plan would have resulted in a cost structure that made us noncompetitive, so it was not an acceptable option.