Don't Pay a Percentage of a Transaction to Set Up an ESOP

Recently, I got a call from a financial advisor. His client was thinking of setting up an ESOP as a business transition tool for a $15 million company. The client had been approached by a New York investment banking company that quoted them a fee of three percent of the transaction. I had never heard of the firm. They told him they knew $450,000 was a lot of money, but the tax savings would more than justify it (in California, the tax savings could be a deferral of $3.75 million, so depending on assumptions about future tax rates and when the reinvested securities would be sold, this could be true). The advisor was uneasy with this proposal and said he would get the company to join so they could get the straight story on setting up an ESOP and referrals to legitimate ESOP experts.

If you are thinking about an ESOP, do not pay a percentage of the transaction on the sale to set up a plan. No legitimate ESOP attorney charges such a fee, and, for a company this size, $450,000 is many times what is probably needed to set up a plan. In a few complex cases, companies may need investment banking services to help raise financing, in which case a percentage of the financing can be charged, but the very large majority of ESOPs do not need this kind of service.