Pros and Cons of Employee Stock Ownership Plans (ESOPs)

An employee stock ownership plan (ESOP) are utilized by private equity (PE) firms and business owners as an alternative exit strategy to structure a business sale or acquisition. PE firms collaborate with ESOPs to secure investments and use it as a form of exit strategy for current portfolio companies. Majority owners can also use ESOPs as a means to transition ownership in a management buyout. The article will present an overview of ESOPs including the purposes, characteristics, structures as well as the benefits and disadvantages of structuring an ESOP. Overview ESOPs are tax-qualified retirement plans subject to the Employee Retirement Income Security Act of 1974 (ERISA) and are used in transactions for acquisitions. In a transaction, ESOPs can be used to buy shares and to acquire 100% of a company’s stock in one transaction. The main aspect of the ESOP is that it must be invested in employer stock. Purposes Utilized in the succession organizing of a company’s…

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