Employee Stock

Employee Stock Ownership Plans ("ESOP") were created in 1974 by the Employee Retirement Income Security Act ("ERISA") as a vehicle to motivate employees by giving them company ownership. The authors of ERISA hoped that employee empowerment would increase the US workforce's overall efficiency.

ESOPs are commonly structured as legal trusts, separate from the company. The trust, not the company, borrows money at a favorable rate to repurchase owners' shares. Employees may then buy shares in the trust. Since the ESOP does not have any source of revenue, the company makes contributions to the trust to repay the loan.

To provide an incentive to company owners to create an ESOP, Congress included significant tax and estate planning benefits in the ESOP structure. Some of these benefits include:

• Business owners are allowed to sell their shares to the ESOP and reinvest the proceeds tax-free;


• Shareholders of the ESOP benefit from tax deferral and savings; and


• Interest and principal loan repayment contributions made by the company to the ESOP are tax deductible.

Valuations for ESOP purposes are necessary for two reasons. First, when the ESOP is originally formed, the initial purchase from the owner must be fairly priced. Second, the shares owned must be re-valued annually to determine the repurchase price in the event of employee retirement, death, or departure.

ERISA requires an ESOP to pay no more than "adequate consideration", or fair market value, when investing in a businesses' equity. Consequently, plan trustees and fiduciaries must determine, in good faith, the fair market value. These ESOP valuation assertions are then scrutinized by the IRS, the ESOP trustees, and the Department of Labor. As a result of all these unique issues, an appropriate ESOP valuation must be well documented, unbiased, and supportable.

ESOP valuation is a complex matter and must consider each company's unique facts and circumstances. Adams Capital's professionals have substantial experience valuing businesses and supporting our conclusions for ESOP. Please contact us to discuss your ESOP valuation needs.

For permission to reproduce or quote this brochure, please contact info@adamscapital.com.

Please click here to view the newletter on ESOP's

Return to Business Valuation Page

home directions newsletters site map

©Copyright 2005, Adams Capital, Inc.
Updated April 2005
Adams Capital, Inc. - Business Valuation Services
600 Galleria Parkway, Suite 1850, Atlanta, GA 30339
770-432-0308 FAX 770-432-4138

send comments or questions to