When considering an employee stock ownership plan, employers should consult their adviser — and a host of other professionals, too. “You have to put a team together. It’s a highly technical environment,” says John Carnevale, president and CEO of Sentinel Benefits and Financial Group. “They’re not complicated once you know how to do them, but they’re special. They’re different from a standard 401(k) plan.”

The first step is to have a business appraiser determine the company’s worth, Carnevale says. An attorney is needed to handle the legal aspects of the ESOP and a third-party administrator takes care of the bookkeeping and accounting, he says.

The multitude of moving parts is what makes ESOPs complicated, Carnevale says. An owner is selling their business, employees are buying stock and a qualified retirement plan is being set up. “You’re doing a lot of things at the same time,” he says. That can lead to unforeseen problems. “Go slowly,” Carnevale says. “Make sure you understand the whole thing before you do it.”

There are successes and failures when it comes to ESOPs, Carnevale says, and engagement is a key factor. “You get out of it what you put into it,” he says. “For the right people, it’s a great deal. For the wrong people, you should avoid it.”

Client retention

Why should a benefit adviser be concerned with whether a client chooses an ESOP or sells to another business owner? The latter could result in a loss of that client.

When a business is sold, the employees are folded into their new employer’s benefits plan and the acquirer’s adviser has a larger client while the other adviser loses a client. The adviser might not be the only one who loses that client — their former accountant, lawyer, bank, etc., might have all shared that client.

If the business was located in a small town and the new employer moves it, that could have a tremendous impact on the residents, says Dan Zugell, senior vice president at Business Transition Advisors, Inc. “That could devastate a local community,” he says. Selling to the employees instead of an outside buyer helps keep those jobs, Zugell says.

It’s also a main reason business owners choose ESOPs, along with the tax incentives. “It’s more about legacy and the workforce,” says Loren Rodgers, executive director of the National Center for Employee Ownership.

Advisers are also needed when an employee leaves the company and sells their stock. Typically, individuals roll that money into an IRA, and they need assistance, Zugell says.

There are an estimated 7,000 ESOPs covering 13.5 million employees, according to the NCEO, and Rodgers anticipates 2014 and 2015 will be strong years for ESOPs once he sees the data, which is based on Form 5500 filings. The number of plans has dropped but the number of participants has increased due to ESOPs acquiring other companies, Rodgers says. “There’s been a big uptick in the number of acquisitions that involve ESOPs,” he says.

A business owner must weigh the benefits against the cost of setting up an ESOP. Those benefits can far outweigh the cost if implemented properly, Zugell says.

How can a business owner know if it’s the right fit? “Talk to more than one person when you want to do an ESOP,” Carnevale says.

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