What you will see is more emphasis on due diligence. This will benefit the selling owner, the company and the employees in the long run. Specifically:

Both the company and the ESOP trust will likely hire financial professionals to help guide them in the ESOP formation process. The use of buy-side and sell-side financial professionals is common in other types of merger and acquisition activity and is considered to be a best practice with ESOPs as well. This should help ensure the transaction is done at arm's length and all interests are represented.
There will need to be an increased emphasis on process. Companies and trustees do not have crystal balls. They don't know what the future will hold and for that reason they aren't held to a results-based standard. Rather, they are held to a process standard and they will need to establish processes and make sure they are followed.
Documentation, documentation, documentation. If it isn't written down, it will be treated as if it never existed. It will be important to document not only what was decided but how it was decided.
Trustees will seek competitive bids for service providers, such as the ESOP's attorney, administrator or valuation firm, just to name a few. These services will be reviewed on a regular basis to verify the services provided and costs are appropriate for the ESOP.

These points may cause you to ask: what will this do to the cost of establishing and maintaining an ESOP? Overall costs will likely increase slightly due to increased due diligence. However, the unique tax status afforded ESOPs and the benefits of shared ownership should continue to make them attractive to selling business owners.

Instant Insights /

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