ESOP shares are independently valued on an annual basis. Without that mechanism, there's no real way for the trust to redeem shares when employee-participants exercise the embedded put option. I do agree with what you're saying, but it's a matter of the company's financials more than the actual process by which they're valued. There are plenty of smaller firms that can support an ESOP program provided they have a relatively stable earnings, the ability to continue (or grow) those earnings, and a balance sheet that'll support the leverage. Professional service firms often make good ESOP candidates.An issue with ESOP for a small company that often comes up is fair valuation of the shares....-If you want to get really radical, work towards an ESOP if owner is anywhere near retirement (assuming you have the financials/EBITDA to support such a program)...
An issue to consider is business continuity if the current owner passes away? The firm could be a desirable purchase by a bigger firm who just wants the customer base, say bye-bye to those great working arrangements. I'm aware of a small engineering firm where the owners strategy has been to make a couple of senior employees partners (they bought in with loan from company) and this has allowed the firm to continue through the retirement/disability/death of successive senior owners.
That said, I was simply spit balling in my original reply, so don't mean to derail the conversation. I completely agree with your note on business continuity, and sub-20 employees is likely not worth the hassle of rolling out an ESOP.
Statistics: Posted by SubPar — Thu Apr 04, 2024 3:17 pm — Replies 7 — Views 324