Before Using an Employee Stock Ownership Plan for an Ownership Transfer...

You Should Carefully Read this little JUNGLE Story...

It could be about YOU!

Once upon a time, there was an old lion that owned a nice business. Unfortunately, he did not have any cubs to take his place since he had no mane squeeze (ooh). Since the old lion knew that even he, the king of the jungle, would not live forever, he hired some hares to help plan his estate.

The hares were quick (of course) to tell the old lion to sell his company to an Employee Stock Ownership Plan (ESOP). Some of the hares were rabbit (ooh) about it. The lion roared with approval, because he liked the idea of liquidity and the tax benefits. He also wanted his employees (mice) to share in his company's success. For many years, everyone lived happily ever after. Nothing much changed. The lion counted his cash and kept paying himself a kingly salary to run the company. He also took a lion's share (ooh) of the extra benefits. He spent a lot of time on his hobby, a Lionel train set. The company grew steadily, and every year its value (determined by an independent appraiser, a wise owl) rose.

But then one year, bad things happened. A drought caused the jungle's economy to dry up. A young lion with a better product started to compete, taking a chunk out of the old lion's hide. At the end of that year, the owl's valuation of the Company was lower.

Things then got worse. One of the employee mice, operating on the theory that the squeaky (!) wheel gets the grease, complained that his shares had depreciated. (He actually said, “Who Moved My Cheese?”, but that's another story.) This got the attention of a famous big game hunter, the Department of Labor.

The hunter stalked into the old lion's office (which was decorated like a den) and accused him of taking too much compensation, treating the mice unfairly and, even worse, of selling his company to them for too high a price. A huge battle ensued, and the old lion ended up having to give back some of this sale proceeds to the mice. In addition, he had to pay the hares expensive fees to defend him. All in all, the lion suffered a marked loss of pride (ooh).

The moral of the story: ESOPs are attractive because of their benefits to company owners, but when the company's value falls, the cost can be very great…and that ain't lion!