Employee Stock Ownership Plan (esop)

Part A

Employee Stock Ownership Plan (ESOP)

Steve wanted to utilize an ESOP to purchase the company for two reasons. First, he could not afford it by himself. National Medical Devices offered cash and stock valued at $8.5 million to buy out the company with the condition that Steve must stay with the company and manage the daily operations. Steve thought if he was to stay and run the company, he wanted to be rewarded with the benefits that ownership often provides. Therefore, he considered the idea of personally buying out the ownership of the other three shareholders. The other shareholders were willing to sell their shares. However, the buyout offer from National Medical Devices established a company value of $8.5 million in their minds. Steve could only come up with approximately $3.5 million of his own funds which was far short of the amount offered by National Medical Devices.

The second reason to use the ESOP to purchase the company is to build up the relationship with employees in the company. Through this plan structure, it would provide the employees the motivation to be more productive and become company oriented. This plan gives the key employees who replacing the three shareholders’ position the incentives to align their interest with the interest of the company.

Advantages of ESOP Plan

Takeover Protection: An ESOP can provide some protections against any unwelcome takeover attempts.

Tax Deductions: When an ESOP borrows money to acquire shares from the company, principal and interest payments on the loan may be deductible as business expenses by the company. This will significantly reduce the corporation’s after tax costs. Additionally, dividends paid to the ESOP may be deductible as business expenses by the company.

Employee Motivation: This plan will motivate