What is an ESOP and how does it differ from a recapitalization?
An ESOP, employee stock option plan, is a federally regulated employee benefit plan that allows the employees of a company to become owners in that company. The ESOP borrows the funds necessary to purchase a portion of the owner’s stake in the business for the benefit of the participating employees. The cash that the owner receives from this transaction provides a measure of liquidity. The commonly attributed benefits of an ESOP are favorable federal tax treatment of the proceeds that the owner receives in the transaction, deductibility of principal and interest of the ESOP financing and a positive incentivizing of company employees. There are also many disadvantages to ESOPs that must be considered, and after reviewing the structure, many owners have concluded hat the disadvantages outweigh the advantages. The foremost disadvantage concerns the valuation at which the ESOP will purchase the shares from the owner. Valuations of businesses for the purposes of an ESOP tend to be extremely
