ESOP - Employee Stock Ownership Plans

ESOP, the owner may wish to sell minority interests to employees or outside investors. An ESOP is a tax-advantaged vehicle for employees to own shares of the company. The ESOP may own anywhere from less than 1% to 100% of the company. If the ESOP owns a minority interest, the shares must be valued as minority shares. However, the discount from a proportional share of the enterprise value is usually only 10% to 15%, because it is offset by a mandatory "put" option by which the employees have the option to sell the shares at fair market value on termination of employment.

The ESOP may acquire the shares either from an existing stockholder or by the company issuing new shares to the ESOP. If the company issues new shares to the ESOP, it can take a deduction from its taxable income for the fair market value of the shares issued. The ESOP must have a qualified appraisal of the shares at least once a year.