A few weeks ago, I wrote about
Employee Stock Ownership Plans (ESOPs) as a possible exit strategy for a privately held company. My company is in the initial stages of researching this option. To that end, I some researching and got several quotes from ESOP implementation specialists. For a company of our size, the quotes came out to about:
Setup$5000 consultation and setup
$7500 legal
$15000 first year valuation
Annual
$5000 annual valuation
$2500 record-keeping
legal fees charged by hour
Compared to our
Employee Fiduciary 401K plan, it is quite a bit more expensive. This means at the minimum, you need to have enough profit where the tax savings can override the annual fees. If we amortize the annual fees over 10 years, the cost appears to be about $13K/year. To get a baseline, we take the numbers from my previous ESOP article.
Option 1: Profits as Salary = -50K
Option 2: Profits as ESOP share purchase = -29K
For this simple scenario of distributing 100K in profits, we have a 21K tax savings by using an ESOP. However, the 13K/yr eats into it. Tax-adjusted, it's less than 13K but I don't want to re-do all the formulas so let's just keep the math simple at 21K-13K for 8K tax savings.
If this example company had very consistent earnings/profits, an ESOP
might make sense at the 100K profit level. However, performance of most small businesses fluctuate with the economic cycles. In years where you have less than 75K in profits, all tax savings would be taken up completely by the ESOP costs. And in years where you have no profits or a loss, an ESOP would be an extra drag you don't need. For that example company, I would not feel comfortable starting an ESOP until annual profits on average were 200K with a range of 50K to 350K.
What my company has done is paid the initial 5K consulting fee and also a 5K pre-valuation fee. Even if we don't ultimately go down the ESOP road, the pre-valuation will at least give us a starting point number we can bring to potential investors interested in a buyout.
(Filed in exit strategies, taxes)
ESOP fees
Posted by Mossy
February 26, 2010 9:48 AM
Setup
$5000 consultation and setup
$7500 legal
$15000 first year valuation
Annual
$5000 annual valuation
$2500 record-keeping
legal fees charged by hour
Compared to our Employee Fiduciary 401K plan, it is quite a bit more expensive. This means at the minimum, you need to have enough profit where the tax savings can override the annual fees. If we amortize the annual fees over 10 years, the cost appears to be about $13K/year. To get a baseline, we take the numbers from my previous ESOP article.
Option 1: Profits as Salary = -50K
Option 2: Profits as ESOP share purchase = -29K
For this simple scenario of distributing 100K in profits, we have a 21K tax savings by using an ESOP. However, the 13K/yr eats into it. Tax-adjusted, it's less than 13K but I don't want to re-do all the formulas so let's just keep the math simple at 21K-13K for 8K tax savings.
If this example company had very consistent earnings/profits, an ESOP might make sense at the 100K profit level. However, performance of most small businesses fluctuate with the economic cycles. In years where you have less than 75K in profits, all tax savings would be taken up completely by the ESOP costs. And in years where you have no profits or a loss, an ESOP would be an extra drag you don't need. For that example company, I would not feel comfortable starting an ESOP until annual profits on average were 200K with a range of 50K to 350K.
What my company has done is paid the initial 5K consulting fee and also a 5K pre-valuation fee. Even if we don't ultimately go down the ESOP road, the pre-valuation will at least give us a starting point number we can bring to potential investors interested in a buyout.
(Filed in exit strategies, taxes)
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