Leveraged ESOPs and Employee Buyouts

An ESOP (employee stock ownership plan) is a tax-qualified benefit plan that is designed to invest primarily in company stock. Among other things, an ESOP can be used to purchase shares from retiring owners in closely held companies; buy out divisions, product lines, or entire companies; finance new capital; and provide a tax-advantaged employee benefit. There are over 11,000 U.S. companies with ESOPs, covering well over 8 million employees.

Many ESOPs are leveraged, meaning that the plan borrows money on the employer company's credit to buy company stock. It is the only qualified employee benefit plan that can do this. Moreover, the company can deduct ESOP contributions it makes for both principal and interest payments for the loan, and owners of closely held C corporations who sell to an ESOP can avoid paying capital gains tax on the sale proceeds by reinvesting them in qualifying U.S. securities.

Written by leading experts, this book is a practical tool for business owners, managers, and advisors dealing with both public and private companies. It covers contribution limits, valuation issues, financing, accounting, the tax-deferred "rollover," employee buyout feasibility, mergers and acquisitions, and other relevant topics. The book is designed to be used by both public and private companies as well as their professional advisors. (Note: This book is about the U.S. ESOP, not plans called "ESOPs" in other countries.)

The fifth edition has been revised to reflect the latest developments in ESOP law and practice.

Laurence A. Goldberg is a partner in the San Francisco office of the law firm Kirkpatrick & Lockhart LLP. He focuses his practice on the design, implementation, and operation of ESOPs and also advises clients on various types of pension and profit sharing plans.

Luis Granados is a partner in McDermott, Will & Emery’s Washington, D.C., office. He focuses his practice on ESOPs, having been active in the field for many years, and has written many articles on the subject.

David C. Light is a managing director at Duff & Phelps LLC. Mr. Light has managed a wide variety of corporate finance transactions and advisory engagements for public and private company owners, boards of directors, and trustees. His work has focused on structuring ESOP transactions, fairness opinion work for boards of directors and ESOP trustees, incentive program design, compliance work, corporate planning for owners, and litigation support. Mr. Light is president of the Business Valuation Association and is a member of the NCEO and the ESOP Association.

Richard C. May became a member of the management committee at Duff & Phelps, LLC, after its merger with Valuemetrics, a financial advisory firm he founded in 1981. He has worked with owners of privately and publicly held corporations for more than two decades, assisting in ownership succession planning and recapitalizations using debt and equity financing. He is regarded as a leading expert in business valuation, particularly ESOPs. Mr. May has served as chairman of the Valuation Advisory Committee of the ESOP Association, is a senior member of the American Society of Appraisers, is a member of the Business Valuation Association, and is an associate member of the National Center for Employee Ownership.

Robert L. McDonald is the Erwin P. Nemmers Distinguished Professor of Finance at Northwestern’s Kellogg School of Management. He has been a faculty member at Northwestern since 1984 and has also served as department chair. Professor McDonald’s research interests include corporate finance, taxation, derivatives, and applications of option pricing theory to corporate investments. He is co-editor of the Review of Financial Studies. Most recently, he completed an authoritative textbook, Derivatives Markets.

Rebecca J. Miller is a partner with the accounting firm of McGladrey & Pullen, LLP. In 1999 she was named to the U.S. Department of Labor’s Advisory Council on Employee Welfare and Pension Benefit Plans. She was on the AICPA’s ESOP task force responsible for drafting the current accounting standard covering ESOPs, Statement of Position 93-6: Employers’ Accounting for Employee Stock Ownership Plans. In addition, from 1996 through 1998, Ms. Miller served on the AICPA’s Employee Plans Committee, which is responsible for developing the standards covering the plan's financial reporting and the responsibilities of the plan's auditors.

Deborah Groban Olson is an attorney who has specialized since 1981 in employee ownership projects. She creates and advises employee owned companies and equity compensation plans (including ESOPs, stock options, and cooperatives), representing companies, non-profit organizations, unions, families who own companies, trusts, and employees. Olson is executive director of the Capital Ownership Group (COG), a global network and online policy institute at Kent State University, developing policy for broadening capital ownership globally. She is a board member and past board chair of the National Center for Employee Ownership (NCEO) and a board member of the European Federation of Employed Shareholders (EFES).

Scott Rodrick is the director of publications and information technology at the National Center for Employee Ownership (NCEO). Mr. Rodrick is the author of the NCEO’s booklet An Introduction to ESOPs (6th ed. 2004), the editor and or/coauthor of various other NCEO publications, and the coeditor of Employee Stock Ownership Plans (Harcourt Brace, 1996, 1999). He served at