The Employee Stock Ownership Plan concept was developed in the 1950s by lawyer and investment banker Louis Kelso, who argued that the capitalist system would be stronger if all workers, not just a few stockholders, could share in owning capital-producing assets. But, few companies took up Kelso's ideas because an ESOP's authority to borrow money to buy stock for participants was based on IRS rulings and had no clear statutory authorization.

In 1973, Kelso convinced Senator Russell Long, Chairman of the tax-writing Senate Finance Committee, that tax benefits for ESOPs should be permitted and encouraged under employee benefit law. Soon, federal legislation promoting ESOPs appeared, most importantly the Employee Retirement Income Security Act of 1974 (ERISA), which governs employee benefit plans and established a statutory framework for the Employee Stock Ownership Plan.

In the following years, the number of ESOPs expanded dramatically now that sharing ownership was in the economic self-interest of company owners. From time to time since then, Congress has modified the laws governing ESOPs, most notably in the Tax Reform Acts of 1984 and 1986, the Small Business Job Protection Act of 1996, the Taxpayer Relief Act of 1997, and the Economic Growth and Tax Relief Reconciliation Act of 2001.

Today there are about 11,500 ESOPs in place covering over 10 million employees. 401(k) plans, by contrast, cover about half this amount. ESOPs are found in publicly traded and closely held companies of every size, however, most ESOP-owned companies have 15 or more employees, with a median of roughly 100 employees.

Like the common 401(k) and profit sharing plans, an ESOP is a tax-qualified retirement plan governed by ERISA. Technically, an ESOP is a stock bonus plan qualified to borrow money. Yet, unlike other qualified plans, ESOPs 0 are required to invest primarily in the stock of the plan sponsor.

Essentially, a leveraged ESOP is an intermediary in a loan transaction. Rather than borrow the money directly, a company borrows it through an ESOP. The steps involved in a typical transaction include:

There are numerous advantages to selling a private company to an ESOP, rather than to an outsider. These benefits accrue to the seller, the company, and to the employees. No other acquirer can offer such an array of advantages.

There are many misconceptions about ESOPs being volleyed around today, both in the press, and by professionals from varying fields. More importantly, business owners tend to shun ideas that are new or different, or they build their own points of view from sometimes-imperfect information. The following misconceptions are from the standpoint of the business owner, but can be applied to virtually anyone not versed in ESOPs.

Owning a business and selling a business require two distinctly different skill sets. Therefore, when you begin making your retirement plans, you will be faced with a myriad of new challenges. How will I find a buyer? How much is my company worth? How long will it take to sell? How can I keep my plans confidential and still market the company to potential buyers?

All of these questions are answered though our proprietary ESOP buyout process. Dynasty Capital Advisors' buyout process follows five discrete steps, adding form and structure to a normally disjointed process.

The results of this study determine if the proposed transaction is viable. It explores traditional due diligence areas such as market, organizational, management, operational, financial, and legal issues.

Dynasty Capital arranges financing for the proposed transaction. Financing may be in the form of debt instruments, equity investments, or a combination of the two.

Dynasty Capital's legal team develops the ESOP plan document, tailoring it to fit the individual needs of the client company.

In accordance with ESOP statutes, a business valuation is performed by an independent valuation analyst. Dynasty Capital Advisors maintains ties with some of the country's leading ESOP valuation firms.

At the close of the transaction, the business interest is sold to the ESOP; and the selling shareholder receives a check for the fair market value of the shares sold.

Prior to formally engaging in any transaction, we offer our clients a free preliminary valuation analysis to determine a value range for the shares being sold. We then compare our findings with our client's value expectations. If our values are materially different, we will generally forego the transaction, or suggest other alternatives.

The laws governing employee stock ownership plans require that the ESOP pay no more than fair market value for the shares it acquires. Accordingly, our free preliminary valuation analysis alerts us early in the relationship to any valuation concerns.