Employee Stock Ownership Plans (ESOPs) – Wharton Valuation Associates

ESOPs have emerged as a popular way for owners of closely held companies to create a market for their stocks. ESOPs are popular in part due to their significant tax advantages: under certain circumstances the seller is able to defer capital gains taxes on the sale of his stock to an ESOP, or eliminate them entirely if qualified replacement securities are held until death. Subject to applicable regulations, the contributions to ESOPs are tax deductible to the sponsor company as an employee benefit expense. This vehicle also makes it possible to deduct for tax purposes the principal payments on ESOP-related debt incurred by the company.

Regulations state that purchases of stock by the ESOP must not be for more than “fair and adequate consideration.” For this reason, it must be demonstrated that the ESOP paid a fair price for its shares at the time of the transaction. Thereafter, appraisals of the stock held by the ESOP must be performed annually. Compliance with the applicable regulations is monitored by the IRS and the Department of Labor. Under the right circumstances, ESOPs are excellent ownership succession devices, but they must be supported by well conceived and well executed valuations of the company’s stock. Wharton’s professionals have been providing fairness opinions for shares of ESOP companies for many years and they are well versed in the many nuances associated with these valuations.