Creating Buyers: The ESOP as Exit Strategy discusses what we have been observing in the last quarter of 2009 – interest in ESOP transactions seems to be trending upward. A primary reason given is the fear that capital gains rates will likely be going up soon:

Now, though, interest in creating ESOPs seems to be ticking up, says Elyse Bluth, managing director and head of the ESOP practice at Duff & Phelps, an independent financial-advisory and investment-banking firm in Chicago. That interest is gaining urgency, she adds, among business owners worried that tax rates on capital gains may go up in the year ahead; they want to sell now while the rates remain at 15%.

It also discusses the importance of monitoring your cash flow and debt-servicing requirements, ensuring the ESOP pays no more than fair market value, and communicating with the employees about the financial health of the company:

"Employee buyouts are a key issue in terms of cash flow and cash requirements," says Dave Lesse, CFO of DWF. "Anyone contemplating the establishment of an ESOP must weigh these costs, as well as the debt-servicing requirements, against future growth opportunities."

CFOs also will want to make sure the sale to the ESOP is fairly priced. The law requires that the company be valued by an independent, third-party expert. "If the Internal Revenue Service and the Department of Labor find out you sold it for too much," says Keeling, "you're in big trouble with them — and they do bring lawsuits. ESOPs are pretty well regulated. You can count on being audited by the [Department of Labor] and/or the [Internal Revenue Service] within five or six years of creating one."

Finally, CFOs should be prepared to communicate more regularly and in more detail to employees about the financial health of the company once the transaction goes through, since those employees now will be shareholders of the organization, too. "We've always been pretty open with information," notes DWF's Lisowski, "but now we're trying to do quarterly newsletters to update them on the highlights of what's going on with the company."