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Private Capital Markets: Valuation, Capitalization, and Transfer of Private Business Interests + Website, 2nd Edition by Robert T. Slee

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CHAPTER 27

Employee Stock Ownership Plans

Many owners of private companies desire partial shareholder liquidity without having to lose control of the business. These owners may also want to transfer beneficial ownership of their companies to their employees. This can be accomplished in numerous ways. Employees can buy stock directly, be given stock as a bonus, receive stock options, or obtain stock through a profit-sharing plan. A common form of employee ownership in the United States is the employee stock ownership plan (ESOP). The ESOP is popular because it can accomplish the transfer objective in a much more tax-efficient manner than the other methods. More than 11,000 companies now have these plans, covering more than 13 million employees. This chapter describes ESOPs in general, illustrates the issues surrounding ESOP implementation, and concludes with a discussion of points to consider regarding an ESOP creation.

The ESOP is at once a corporate finance tool and a qualified retirement benefit for employees; it is also a means of redistributing industrial wealth to workers in an effort to stimulate economic growth. Because of this, ESOPs have enjoyed continued support from both aisles of Congress since their creation several decades ago.

The modern-day ESOP parallels the theory first put forth by a prominent German economist, Johann Von Thunen, during the early days of the Industrial Revolution. Von Thunen put an ESOP of sorts into being when he set aside a share of his farm's ...

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