Cost to Establish and Maintain an ESOP
Twelve Bogus Reasons Not to Do an ESOP (and Seven Good Ones) contains a list of twelve fallacies that are are commonly cited as reaons to not implement an employee stock ownership plan (ESOP): - ESOPs have excessively high legal and administrative costs, especially for small firms
- The ESOP cannot match what other buyers will offer
- The employees don't have the funds to buy the company
- Employees must invest in other retirement plans to diversify their investment
- Companies have to make a fixed contribution every year
- Bank credit for an ESOP loan is not available
- Companies have to keep repurchasing their own shares
- Management must share financial information with employees
- Younger employees are more concerned with short-term cash than with potential retirement benefits
- ESOPs are difficult for employees to understand and appreciate
- ESOPs do not improve corporate performance
- You can only do an ESOP in a public company
COST TO ESTABLISH AND MAINTAIN AN ESOP
Today's post is focused on reason #1: ESOPs have excessively high legal and administrative costs, especially for small firms
To be sure, an ESOP is more expensive than, say, setting up a 401(k) plan, but it is a lot cheaper than selling a business almost any other way. An ESOP will probably cost $50,000 to $100,000 to set up and run the first year and, for most companies with under a few hundred people, $15,000 to $30,000 annually. Selling to another company involves, usually, some tens of thousands of dollars in legal, accounting, and valuation fees, plus, if there is a broker, as there often is, another 5% to 10% of the transaction. There is no broker in an ESOP. So for most sellers of all but the smallest companies, an ESOP is actually much cheaper than selling some other way.
This is one of the fallacies that I see when reviewing mainstream ESOP coverage and talking to non-ESOP business professionals. The cost to implement an ESOP can be significantly less than other forms of business transition. In addition to the tax and legal expenses, a third party sale often involves a broker charging 5-10% of the transaction price. There is no broker involved in an ESOP transaction. For smaller firms, I want to point out that I am seeing fees lower than the $50,000 - $100,000 that was quoted in the article. Smaller firms should be able to establish an ESOP using qualified ESOP experts for as low as $25,000 to $30,000 and maintain an ESOP for as low as $10,000 to $15,000 per year. More complex structures can push a deal closer to the $50,000+ discussed in the article, but a basic ESOP structure can be established for less without sacrificing the quality of expertise that you are receiving.