Is an ESOP Right for My Client (Assessment Tool)

With four simple questions, you can see if an employee stock ownership plan (ESOP) may be a good fit for your client’s succession planning goals.

Question 1

Does your client’s company have 30+ employees?

Why is this important?

Generally, an ESOP works best for companies with 30 or more employees because there are ongoing costs to operate the plan. It’s important to make sure that the client’s business stands to benefit enough from the ESOP to justify its cost. In addition, smaller companies often tend to be classified as Sub S corporations, which requires them to pass required plan testing.

Yes
No

Question 2

Is the company worth at least $3 million?

Why is this important?

ESOPs typically work best for companies with a value of $3 million or more. There are ongoing costs to operating an ESOP. It’s important to make sure the business is valued high enough to enjoy the benefits of an ESOP without being affected by the cost. In addition, because ESOP is a long-term product, it’s important to help ensure the company is viable to continue into the future.
Yes
No

Question 3

Is the company’s net income after taxes at least $300,000?

Why is this important?

Since ESOPs have a yearly financial commitment, they typically work best for companies that are financially sound, with predictable, stable cash flows. The ESOP adds a fixed cost that the company has to absorb.
Yes
No

Question 4

Has the company been in business at least 3 years?

Why is this important?

There are several reasons why it’s important for a company to have a relatively established track record:

  1. Banks are unlikely to approve a loan to finance an ESOP if the company is less than three years old.
  2. A more stable, established company is more likely to still be in business in future years for employees to benefit from an ESOP.
  3. Many start-up companies haven’t achieved a level of sales or profitability to consider an ESOP.
Yes
No
Survey results and comments will be used by Principal® for the consideration of new sales opportunities. The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice.

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The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.

Insurance products and plan administrative services provided through Principal Life Insurance Co., a member of the Principal Financial Group®, Des Moines, Iowa 50392.

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