Business Valuations and Fairness Opinions are used to initially independently determine if an ESOP is feasible for a company, and subsequently to establish the worth of a company for ESOP purposes. 


  • Qualified Plan governed by ERISA.
  • Required to be invested primarily in the sponsoring employer securities.
  • May be used as a corporate finance technique.
  • Often used as an exit strategy for a retiring shareholder. The ability for the ESOP to incur debt and the ability for the selling shareholder to reinvest the proceeds on a tax deferred basis is very attractive.
  • Creates a market for the stock of a closely held company and make the purchase of that stock a pretax (deductible) expense.
  • IRC 1042
    • Rollover – Allows the seller of stock to reinvest the proceeds from the sale in qualified replacement securities (conditioned on a sale of at least 30% of the company’s outstanding stock and that the reinvestment occur in the next 12 to 15 months).
    • A bank or other lender funds the transaction in order to take advantage of IRC 1042.


  • Must satisfy the Department of Labor and the Internal Revenue Service.
  • ESOP specific considerations –
    • Adequate consideration
    • The effects of leverage and the treatment of debt
    • Fair compensation
    • Repurchase liability
    • Mandatory put option
    • Lack of marketability
    • Control and minority interests
    • Marketability issues
    • Using non-voting shares
    • Tax deductibility of ESOP contributions

 In addition to the employee benefits for all employees, ESOPs are often regarded as the most effective and efficient method for business owners to transfer ownership of closely-held companies. [ESOP = (A) Tax deferred sale of company shares + (B) tax deductible principal loan repayment = (C) happy employees.]