Is Your Company an Employee Stock Ownership Plan (ESOP) Candidate?

When the circumstances are right, ESOPs present compelling competitive, financial, legacy and cultural benefits for selling shareholders, companies and employees. For business owners weighing their exit options, a leveraged ESOP may be feasible if the owner, the company and its employees possess a good number of these attributes:

Owner Attributes:

  1. Owns 30% or more of corporate stock
  2. Has a low basis in the stock
  3. Looking to reduce involvement in the company, either long term (5 to 10 years) or short term when successor(s) are in place and capable of taking over
  4. Concerned with employee welfare and looking to reward them by transferring an interest in company stock to them
  5. Interested in selling shares on a tax-deferred basis
  6. Willing to sell for fair market value and forgo the possibility of selling for substantially more through an M&A sale process

Company / Employee Attributes:

  1. Mature, non-cyclical business with strong operating performance (revenue and profit margins), past and projected
  2. A balance sheet strong enough to absorb ESOP acquisition debt
  3. Adequate cash flow from operations to comfortably cover capital spending needs and debt service for ESOP acquisition and other borrowings
  4. Adequate payroll, say $1,000,000 or more per year
  5. 20+ employees
  6. A participatory management culture, and open and effective communications between employees and management
  7. Sufficient corporate leadership and management bench to succeed long term

These rules of thumb are just a few of the points to keep in mind if you are considering transferring your company to employees through an Employee Stock Ownership Plan. ESOPs are complex to set up and costly to administer and maintain in compliance with IRS and DOL regulations. They are not for everyone. ESOP is a very complex area that well understood by very few CFO’s, attorneys, CPAs and M&A advisors.

To find help to determine the feasibility of an ESOP for your California company, feel free to contact Al Statz at 707-781-8580 or