Like other business succession planning and exit strategy tools, employee stock ownership plans (ESOPs) can vary quite a bit. Depending on your needs in terms of liquidity, transaction financing, estate planning, tax deferral strategies, and plan design, your ESOP could include complexities that call for the expertise of an ESOP attorney.
It’s important to understand that, as a qualified retirement plan, an ESOP is subject to the Employee Retirement Security Act of 1974 (ERISA), and is regulated by the Department of Labor and the Internal Revenue Service (IRS).
An experienced third-party administrator (TPA) can help ensure that your plan design and documents meet both your individual needs and regulatory requirements. You can consult with them in advance to explore whether an ESOP is a good fit for your business, and even model different ESOP ownership percentages, transaction structures, and financing options to help you make the best decisions.
When you need ESOP-related legal advice and services, it’s certainly important to look for an ESOP lawyer who can demonstrate experience. After all, the experts you choose to work with at the beginning can have an impact on your ESOP company’s long-term success.
So, how can you find the right legal professional to advise your ESOP?
Look for a Specialist in ESOP Law Over a Generalist
Over many years in business, you may find yourself with your own trusted professionals, and that could include a business attorney. But before you ask them to advise on an ESOP formation and sale, ask how many they’ve done. Why? Compared with other business sale transactions, ESOP sales are relatively less common. Do you really want to be the first?
For better or worse, some professionals who are experts in their niches tend to underestimate the expertise needed in other fields. The business lawyer who takes your ESOP too lightly could quickly lead you and your business down a rough path. On the other hand, an attorney who’s never worked with an ESOP might just try to steer you toward some other exit strategy in an effort to preserve you as a client.
A better start may be to access the resources available through the National Center for Employee Ownership (NCEO) and the ESOP Association. Even so, it’s important to recognize that these organizations do not actually recommend providers listed within their directories. Due diligence is up to the business owner, so do your research.
Look for an attorney with experience working with TPAs, ESOP trustees, valuation experts, and financial professionals, since an ESOP typically involves people in all these roles.
RELATED: Does an ESOP Need Specialized Accounting, Legal & Tax Services?
Understand Which Legal Services You Actually Need
Services that some law firms provide have a great deal of cross-over with those of TPAs and other ESOP professionals. In fact, you may want to look into just how they perform some services such as:
- Feasibility studies
- ESOP transactions
- Plan design and documents
- Repurchase obligation studies
- ESOP administration services
- Financing and loan documentation
If these tasks are outsourced or contracted, and clients pay an upcharge, is the upcharge fair? Who stands behind the expertise of those actually performing the tasks?
It’s also crucial to understand that certain aspects of an ESOP simply belong in the hands of an attorney. Legal questions can arise around fiduciary responsibilities, employer securities, ERISA and IRC regulations on prohibited transactions, and plenty of other issues. In some cases, ESOP attorneys are hired by ESOPs to serve as independent fiduciaries.
Ultimately, the ESOP attorney you choose to work with should be ready and willing to work cooperatively and collegially with your other professional advisors. And, if you’re not sure yet whether you’re ready for an ESOP, arrange for a no-cost consultation with the experts at ESOP Partners. You’ll get a clear idea whether an ESOP is the best option for your exit strategy — so you can move forward with confidence, no matter who you choose to work with.
In the meantime, it pays to get a better understanding of an ESOP’s corporate governance requirements, the relationship between the trustee and the board of directors, and the responsibilities of key governance roles. Download our eBook, Corporate Governance & Your ESOP. Just click below to get your free copy.
