Business owners who are interested in selling to an Employee Stock Ownership Plan (ESOP) should pursue an ESOP feasibility study with the following components:

  • Analysis of sale alternatives
  • Valuation analysis
  • ESOP financing sources and terms
  • Deal structure scenarios
  • Post-transaction credit metrics
  • Analysis of employee account balances and additional incentive plans for management
  • Liquidity opportunity for selling shareholder(s)
  • Transaction expenses

Prior to pursuing an ESOP feasibility analysis, owners will be better prepared if they’ve given some thought to the following topics:

What’s my exit horizon? At what point do I want to step away from the day-to-day operations?

How much liquidity do I need/want in retirement? How does this coincide with my estate and tax planning needs?

Additionally, there are two primary, ‘check-the-box’ parameters that should align with the selling shareholders’ objectives:

  • Desire to create wealth for the employees
  • Preserving the company’s legacy and its community impact

What is an ESOP?

At its core, an ESOP is a qualified retirement plan designed to generate a wealth creation opportunity for the employee participants. Selling to an ESOP is one way to maintain a company’s existing operations and jobs within its community that may otherwise be replaced or absorbed when selling to an outside third-party acquirer.

Companies that tend to be a good fit for. employe ownership often possess the following characteristics:

  • Established track record of consistent performance
  • Sufficient cash flow
  • Stable management team

In order to produce a meaningful ESOP feasibility analysis, companies will often need to provide access to their financials, as well as any available forecasts or performance projections. The feasibility analysis can be completed in just a few weeks, and will provide very meaningful data to help company leadership pursue the right exit alternative, and when to begin a transaction process. In some cases, an ESOP may not be the best fit, though for owners unsure of their succession strategy, the exercise can be extremely valuable in refining their options.

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