The federal Main Street Employee Ownership Act, which was signed into law in August, makes it easier for private businesses to transition to an employee-owned business. MWE Partner Paul Becht talks to Newsday about the new law, benefits of instituting an employee stock ownership plan (ESOP), and how to finance one.
In an ESOP, companies set up a trust fund and contribute either cash to buy company stock, contribute shares directly to the plan, or have the plan borrow money to buy shares. The trust buys shares of the company from the owner on behalf of employees as a means of buying the owner out.
“The conversion to an ESOP is often debt financed from a bank,” says Paul Becht, a partner at Margolin, Winer & Evens, LLP in Garden City, a CPA and business advisory firm.
The company must then pay back that debt, which means the business should be currently profitable and confident it will remain profitable for the foreseeable future, he says.
Shares purchased from the owner are allocated to individual employees’ accounts often using a formula based on their compensation, says Becht. If an employee leaves or is terminated, benefit distributions from an ESOP may be made in cash or company stock and are based on how much the employee has vested in the plan, he says.
An independent valuation firm is used to set the value of the shares annually, says Becht. The better the company does, the better the valuation generally, he says. Read more>>>