How do I set up an ESOP?

Step 1: Determine the company’s value. The IRS and the U.S. Department of Labor (DOL) have issued guidance that the ESOP must pay fair market value for the stock it purchases. Step 2: Conduct a feasibility study to analyze the overall framework for the transaction and to determine: How much the company can afford to contribute to the ESOP each year; Whether part of the contribution cost can be offset by eliminating other benefit programs; How the ESOP will affect the company’s earnings and cash flow; How the transaction will be structured; How the ESOP will be financed. Step 3: Obtain financing to purchase stock if a leveraged ESOP is established. Step 4: Document the transaction with experienced ESOP counsel to prepare all ESOP plan documents once financing has been arranged. Step 5: Negotiate a stock purchase agreement between the ESOP fiduciary and the selling shareholder(s), setting the price and terms/conditions under which the ESOP will purchase stock from the selling shareholder(s). Finally: Obtain a written opinion from an independent appraiser, which is required under DOL regulations, to provide the necessary assurance that the ESOP is not paying more than fair market value for the company stock it purchases. Once an owner decides to proceed with an ESOP, the transaction can typically be closed within three months.

How does the ESOP benefit employees?

Each year, company contributions to the ESOP, both cash and stock, are allocated to the accounts of participating employees in the ESOP trust. The accumulated balance in a participant’s account is distributed to the participant after retirement or termination of employment with the company. A participant’s account that remains in the ESOP trust, including the appreciation in stock value, is not taxable to the participant until the participant takes distributions from his or her account. Employees age 55 or older with 10 or more years of participation in the ESOP are allowed to diversify a portion of their ESOP accounts.

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$6.4B+

in assets held¹

years of ESOP-dedicated service²

20+

years team members' average ESOP experience³

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What we do

The J.P. Morgan ESOP Advisory Group is one of the nation’s oldest and largest ESOP Banking groups with clients in all stages of the ESOP lifecycle—from new formations to mature plans. We use this experience to help you understand the benefits and considerations of an ESOP transaction, as well as its potential to address your company’s strategic objectives and your own financial goals. We partner with colleagues throughout the firm to help you evaluate the ESOP transaction in the context of a full suite of different ownership transitions options, and will support you with strategic advice throughout the process. If you decide to pursue the ESOP sale, we stand ready to evaluate potential tailored financing options with you.

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Depth of knowledge

Our team’s dedicated expertise includes professionals with backgrounds in ESOP lending, valuation, financial advisory, fiduciary and a former CFO of an ESOP-owned company. The team regularly speaks at national employee ownership conferences and holds leadership positions in multiple ESOP organizations. This involvement facilitates strong relationships with leading ESOP professionals throughout the industry, while also allowing us to stay current on developing industry practices.

National footprint

As an independent firmwide resource, we collaborate with bankers, underwriters and investment professionals across our firm’s national platform. This includes Commercial Banking, Investment Banking, Wealth Management/Private Banking, Middle Market Financial Sponsors Group and Chase Placements.

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Solving for complexity

We get involved in complex structuring issues—from new and second-stage ESOP transactions, to M&A and corporate financing solutions. Solving for mature ESOP issues, including repurchase obligation, is among our areas of expertise, as is consulting on IRS and Department of Labor compliance issues.

More than financing

As a purely advisory resource within J.P. Morgan, we support your financing activities with education, transaction planning and structuring. We also offer unbiased consultation on the right financing for your business.

FAQs

1. Determine the company’s value. The IRS and the U.S. Department of Labor (DOL) have issued guidance that the ESOP must pay fair market value for the stock it purchases.

2. Conduct a feasibility study to analyze the overall framework for the transaction and to determine:

How much the company can afford to contribute to the ESOP each year
Whether part of the contribution cost can be offset by eliminating other benefit programs
How the ESOP will affect the company’s earnings and cash flow
How the transaction will be structured
How the ESOP will be financed

3. Obtain financing to purchase stock if a leveraged ESOP is established.

4. Document the transaction with experienced ESOP counsel to prepare all ESOP plan documents once financing has been arranged.

5. Negotiate a stock purchase agreement between the ESOP fiduciary and the selling shareholders, setting the price and terms/conditions under which the ESOP will purchase stock from the selling shareholders.

6. Obtain a written opinion from an independent appraiser, which is required under DOL regulations, to provide the necessary assurance that the ESOP is not paying more than fair market value for the company stock it purchases. Once an owner decides to proceed with an ESOP, the transaction can typically be closed within three months.

Each year, the company’s cash and stock contributions to the ESOP are allocated to the accounts of participating employees in the ESOP trust. The accumulated balance in a participant’s account is then distributed to the participant after they retire or end employment with the company.

A participant’s account in the ESOP trust, including any appreciated stock value, is not taxable to the participant until the participant takes distributions. Employees age 55 or older with 10 or more years of participation in the ESOP are allowed to diversify a portion of their ESOP accounts.

An ESOP is leveraged if it borrows money to purchase shares of the company’s stock. The loan may be from a financial institution, or the selling shareholder may finance the transaction by taking back a note for part or all the purchase price. The sponsoring company usually uses its assets to secure the financing.

See more FAQs

Client stories

2:33 - Banking

To plan for the future, Harpoon Brewery looked to its people

Harpoon used an ESOP to preserve its culture, grow its business and celebrate employees.

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References

We have assets in excess of $4.8 billion.

Our dedicated ESOP team—formed more than 10 years ago—is the largest in the U.S., representing a diversity of expertise. All seven team members belong to the ESOP Association, ESCA and NCEO.

Each member of our ESOP Advisory Group has worked with ESOPs for an average of 15 years.

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Employee Stock Ownership Plans