Multi Stage ESOP
Multi Stage Employee Stock Ownership Plans ("ESOP") are the most common type of ESOP transaction. It is very rare that a Company can afford to borrow, collateralize, and fund a buy-out for 100% of its fair market value. Therefore, most ESOP transactions are completed in stages. A properly created, monitored and well executed multi-staged ESOP plan can have tremendous benefits for the business owner, the company, and the employees.
When a company enters into an ESOP transaction there are three separate and distinct groups of people in the company that need to be motivated by future performance of the company. Those three groups are:
- Selling Shareholder(s).
- Management team taking over.
- Rank and file employees and middle management
The ESOP is very good at motivating middle management and rank and file employees. It is not very effective at motivating the management team taking over the Company, and once a selling shareholder emotionally decides to sell a substantial block of stock to the ESOP, their motivation from that day forward is forever changed. The ultimate success of any ESOP, most importantly Multi-Stage ESOPs, rests in the ability to motivate all three groups. This can only be done through what we call "combination planning." Which entails using two or more accepted estate and\or income tax planning tools to give you a desired result.
The selling shareholder needs to continue to have a sense of purpose in helping the business grow. Most shareholders feel that they are not able to benefit from the future growth of the company. They often feel that they are "paying for the company twice".
The management team taking over often feels that they have substantially assisted in growth of the company and are
substantially responsible for the current value paid by the ESOP, Therefore, absent a proper plan, they begin to develop resentment; thinking that they are overpaying for the stock without a clear vision of dramatic upside potential for their future.
Lastly, if the selling shareholder and the management team taking over are not properly motivated the ESOP value begins to stagnate. The selling shareholder may try to find ways to “close out” the ESOP, or if the selling shareholder does completely exit, the management team taking over tries to find ways to “collapse” the ESOP. This leads to the employees feeling as if they did not get the great retirement plan that was promised at the time of implementation.
Multi-stage ESOP plans require more than just a financial consultant that can properly set up a plan and walk away. They need to be able to give all three groups a clear cut long-term plan that properly motivates and COMPENSATES for future performance. Our planning programs allow the selling shareholder to work on the business, not in the business. We have the ability to show the management team taking over a clear cut plan that compensates them for performance, both inside and outside the ESOP. This all translates into share value that accelerates more quickly getting middle management and the rank and file employee excited about the ESOP plan. Proper planning, implementation, and design, with the ability to motivate all three groups, is what makes an ESOP successful. ATICG has the experience and ability to properly plan, design, implement and consult to both new and existing ESOP plans by combining other tools with the ESOP for maximum performance.
