The cost of setting up an ESOP varies considerably, and costs can range from $60,000 to hundreds of thousands of dollars (in 2015). There are several issues to consider:
- Attorney fees: The basic design of the plan itself – filing initial forms with the government, negotiating with lenders, performing due diligence, drawing up trust documents, and coordinating other advisers – are tasks normally done by the attorney. In a leveraged ESOP, additional fees are needed to cover the legal fees for lending institutions, although in rare cases these can be lowered or eliminated. As the complexity of the transaction increases, so will attorney fees. Adding additional classes of stock, changing other benefit plans, negotiating concessions with employees, dealing with multiple investor groups, negotiating with a parent firm, and designing equity opportunities for investors or managers are examples of items that will add costs. Costs can go as high as six figures in the most complex transactions.
- Feasibility assessment: This may be done in house, but it may be wise to hire an accountant or other adviser to assess how much the company can afford to put into an ESOP. These assessments may cost anywhere from several hundred to tens of thousands of dollars, depending on the complexity and level of detail. Most closely held ESOP transactions will not spend a large amount on this phase, however.
- Plan administration: Once the plan is set up, a plan administrator is needed. Although this can be done in house, it rarely makes sense to do so because of the complexity of the administrative requirements. Generally, annual administration costs are modest.
- Trustees: If an independent, outside trustee is hired, it could add another $20,000 to $50,000 per year for most firms, mostly to pay for their risk exposure. An outside trustee, in effect, is an insurance policy. Most closely held firms do not have outside trustees but may hire them for specific decisions.
- Investment bankers: If the company needs assistance locating and securing financing, investment bankers can be hired. They usually charge a percentage of what they finance or the financing they find, often 3% to 7%. This is usually only done in very large transactions. In smaller cases, feasibility, financial structuring, and loan placement are often combined, with typical fees ranging from .5% to 2% of the transaction costs. Many smaller transactions will not use all these services, however. If a company is using seller financing, investment banking fees are not necessary.
- Valuation: An initial appraisal will cost $15,000 and up in most ESOP transactions but can be a multiples of that in complex cases, such as where there are multiple lines of business or different classes of stock. Subsequent annual valuations cost about half this amount.
*these estimates are were made in 2012 and may change over time.
Source: National Center for Employee Ownership (NCEO)
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