Is an ESOP Right for Your Company? An ESOP Feasibility Analysis Can Help You Decide

Is an ESOP Right for Your Company? An ESOP Feasibility Analysis Can Help You Decide

Is an ESOP Right for Your Company? An ESOP Feasibility Analysis Can Help You Decide

As the owner of a private business, you are no doubt aware that, at some point, you will need to plan for an ownership transition. In reality, whether that date is quickly approaching or seems far off in the future, there is no better time to plan than now. Why? In order to make a successful ownership transition, several difficult, very personal decisions need to be made, including the following:

Next, you’ll need to consider the ownership transition options, each of which has its own financial and tax considerations as well as impacts on the employee base:

Ultimately, you will need to determine how these options overlap with your wants, needs and goals.

While the idea of selling to a third-party is usually a familiar option to most business owners, the concept of selling to an ESOP may not be. An ESOP is a liquidity strategy through which owners can sell either 100% or a fractional share of their company to a trust for the benefit of the company’s employees. It is a more controllable, friendly process than a third-party sale, as it allows for both continuity of the corporate culture and continuation of the owner’s legacy.

At its core, the ESOP is a retirement plan that is protected, for your employees’ benefit, by regulations promulgated by the Employee Retirement Income Security Act. With the continuing success of the company, value within each ESOP account grows on a tax deferred basis with liquidity upon the employee’s retirement provided by the company’s repurchase of the employee’s ESOP shares. Notably, studies show that offering an ESOP can be a differentiator in both attracting and retaining employees.

In addition, the ESOP is unique in its tax-efficiency as its debt is repaid with pre-tax dollars. In fact, the 100% ESOP-owned S-corporation pays no taxes. Also, under certain criteria, capital gains taxes to the selling shareholders may be deferred indefinitely.

What Makes a Company a Good Candidate for an ESOP?

Should you find the idea of an ESOP to be consistent with your goals, consider whether your business makes a good candidate for an ESOP. Strong ESOPs are typically defined by:

The Feasibility Analysis

If you believe an ESOP may be the right option to satisfy your personal and business needs for ownership transition, once the business owner and management team are ready, the first concrete step to take is to conduct a feasibility analysis. A feasibility analysis is an evaluation of numerous aspects of your business, and it is an introduction to the ESOP transaction process so that you get a better understanding of what your company’s ESOP would look like and whether it would satisfy the goals and objectives you have established. Once the feasibility analysis is complete, if you determine that an ESOP is not the right ownership transition option for your organization, other transition options can be explored.

As part of the ESOP feasibility analysis, Prairie will meet with you to conduct in-depth due diligence and to confirm that we have a clear understanding of your ESOP transaction objectives. After that, we will:

Once the feasibility analysis is complete, if you decide to move forward, Prairie would be happy to work with you on the transaction strategy, process initiation, managing the transaction process and negotiations, and executing the ESOP transaction. As a nationally recognized advisor to owners of companies considering an ESOP exit strategy, we understand that the sale of your company is a once-in-a-lifetime event, and we are able to offer you comprehensive guidance to help you achieve your goals.

Richard Shuma is a Managing Director at Prairie Capital Advisors, Inc. He can be contacted at 630.413.5598 or by email:

Download the full article above.

Connect With
Prairie Capital Advisors

Subscribe to Our
Resources & Insights