How small is too small for an ESOP?

Question

Accepted Answer

There is no set number of employees or assets that defines how small is too small for an ESOP. Instead, a company should calculate its tax benefits and its costs. If the result is positive, the company is not too small. Even if the results are neutral or negative, however, another step is needed: given the objectives (selling the company, rewarding employees, borrowing money, etc.), what are the after-tax costs of realistic alternatives? Are they less expensive than the ESOP?If an ESOP is not right, an alternative is an Employee Ownership Trust (EOT) or providing equity rights individually to employees. In an EOT the company sets up a special purpose trust whose sole purpose is to become the owner of the shares in the company it acquires. The company can otherwise retain whatever management and governance system it chooses. The trust is designed to own the shares permanently and the employees do not have individual equity rights through the trust. Instead, the employees get dividends or profit sharing. The cost of setting up an EOT significantly lower than those for an ESOP and the company can choose its own rules. The trust is typically funded through a seller note.Alternatively, companies can grant employees equity rights such as stock options, restricted stock, or stock appreciation rights.For more details on ESOP feasibility, see the ESOP Pre-Feasibility Toolkit. For more details on alternative approaches see Using an Employee Ownership Trust for Business Transition and The Decision-Makers Guide to Equity Compensation.