1. Presented By: DANIEL N. JANICH
Is an ESOP Right for You?
Presented By: DANIEL N. JANICH
Holifield Janich & Associates, PLLC
20 North Wacker Drive, Suite 4200
Chicago, IL 60606
Telphone: (312)
Fax: (865)

2. What is an ESOP?
An ESOP is a tax-qualified retirement plan funded solely by employer contributions and designed to invest primarily in employer stock
May only be adopted by corporations
Different tax rules apply to C corporations and S corporations that establish ESOPs

3. What is an ESOP? www.holifieldlaw.com
ESOPs subject to same general requirements under Internal Revenue Code and ERISA as other types of tax-qualified retirement plans
Minimum coverage
Eligibility
Nondiscrimination
Vesting (6-year graded or 3-year cliff)
Reporting & Disclosure (Form 5500, SPD, etc.)
ERISA fiduciary standards (but ERISA’s diversification requirement does not apply)

4. Special ESOP Requirements
Stock sold or contributed to the ESOP must be common stock of the employer (with the greatest dividend and voting rights) or preferred stock convertible into common stock
Stock must be valued by an “independent appraiser” at time of transaction and then annually
For privately held companies, ESOP participants permitted to direct how their account shares are to be voted in certain corporate matters. ESOP trustee votes participant shares on all other corporate matters.

5. Special ESOP Requirements
Special distribution rules apply
Right to receive payment in stock (except for S corporations)
Participants who receive stock distribution can require company to buy back shares at FMV (Put Option) 
Repurchase Liability
Company (not ESOP) must plan future cash needs to pay benefits in cash or buy back stock 
Employee Diversification Rights
Employees age 55 with 10 years of ESOP participation may diversify 25% of their account over 5 years and up to 50% in 6th year.

6. Why Consider an ESOP? www.holifieldlaw.com
For privately held companies, ESOP creates a market for company stock
Tax Advantaged Exit Option: C corporation owners can sell their shares to ESOP on tax-deferred basis (if certain requirements are satisfied)
Employee-Advantaged Option: Employees not terminated when owner exits the company (which may occur upon 3rd party sale)

7. Why Consider an ESOP? www.holifieldlaw.com
Owner-Advantaged Option: ESOP allows owner to gradually give up ownership by selling company to ESOP in stages while remaining involved in company management
Ownership Culture: Employees as shareholders have “skin in the game” and statistics have shown employee owned companies are some of the most productive and profitable in their industry
ESOPs provide significant tax savings for ESOP-owned S corporations

8. Example of How Typical Leveraged
ESOP Transaction Works – $5M Sale of Stock

9. Example of How Typical Leveraged
ESOP Transaction Works – $5M Sale of Stock

10. The Players: Who is Involved in an ESOP Transaction?
Board of Directors
ESOP Committee
ESOP Trustee – Internal or Independent
Independent Appraiser
ESOP Record keeper
Others

11. Who Are the Fiduciaries?
ESOP trustee & ESOP Committee
Board of Directors
ERISA’s fiduciary duties of prudence, best interests of participants, and follow plan documents apply
Understanding of fiduciary obligations is critical before establishing ESOP
Most of the ESOP litigation arises from a breach of fiduciary duty

12. Is Your Company a Good Candidate for an ESOP?
Are you a corporation (C or S)?
Do you have shareholders who will sell all or some of their stock to an ESOP?
Will your company have a strong secondary management team in place after an ESOP is adopted and current shareholders are bought out?
Has your company enjoyed successful operations for at least several years? EBITDA >$5M

13. Is Your Company a Good Candidate for an ESOP?
Is company management willing to undertake the administrative and ERISA fiduciary responsibilities of maintaining an ESOP?
Does the company have strong earnings and cash flow to handle ESOP stock acquisition debt?
Will the payroll of ESOP participants be enough to support the company contributions required to satisfy the ESOP loan repayment obligation?

14. How Do You Get Started? www.holifieldlaw.com
Hire experienced ESOP legal counsel and consultants
Conduct a feasibility study
Secure financing (leveraged ESOP)
Trustee to obtain independent valuation of company stock
Prepare ESOP plan documents (ESOP design considerations)
Negotiate stock purchase agreement (ESOP Trustees – Selling Shareholders)
Take steps to create a “culture of ownership” among employees
Communicate the ESOP to employees—obtain the “buy in” at the outset

15. A Few Helpful Introductory Resources
September 1, 2016 Online Article: Why You Should Let Your Employees Own Your Company–
NCEO Books available for purchase at
An Introduction to ESOPs - How ESOPs work
Leveraged ESOPs and Employee Buyouts –Financing of leveraged ESOP transaction (legal/valuation/accounting)
Understanding ESOPs – General, Basic Guide
S Corporation ESOPs –Unique issues for ESOPs sponsored by S corporations
Selling Your Business to an ESOP – Guide for owners considering sale to ESOP
Don’t Do That – Common mistakes in implementing and operating an ESOP and how to avoid them
For local ESOP chapters:

16. Our ESOP Practice www.holifieldlaw.com
Our lawyers are nationally recognized trusted ESOP advisors experienced in all aspects of the ESOP life cycle, including the design, establishment, maintenance and termination of ESOPs.
We advise selling shareholders, lenders, trustees and plan fiduciaries in ESOP transactions involving corporate acquisitions and mergers, establishment of a plan to incentivize the work force or to ease a business ownership transition and succession, use of an ESOP as a financing tool for management and leveraged buyouts, and in connection with shareholder liquidity events. We develop executive compensation plans and arrangements suitable for ESOP owned companies.

17. Our ESOP Practice www.holifieldlaw.com
Our ESOP litigators have a wealth of specialized in-depth experience in addressing ESOP-related disputes representing ESOP sponsors, plan administrators, Board members, investment bankers, internal and outside trustees, valuation professionals, and other ESOP professional advisors, in courts throughout the country as well as in audits before the Internal Revenue Service and the Department of Labor.
For more information contact Dan Janich at (312) ;

18. Holifield Janich & Associates, PLLC
Questions?
Daniel N. Janich
Holifield Janich & Associates, PLLC
(312)