How to know when your client is good for an ESOP

When business owners think of selling their business, often they look to do an M&A deal with an outside buyer.  ESOP’s, or Employee Stock Ownership Plans, tend to be overlooked by the CPAs and attorneys advising them. If your client has these characteristics, an ESOP plan may be useful to consider.

#1 Tight relationship with employees

How is employee morale? Is turnover low? If the employees and the company have a beneficial relationship, an ESOP plan may be good to consider. ESOPs are ideal for companies of 15 employees or more.

#2 Strong management

If your client’s business has a strong leadership team outside of the owner, chances are that the business could continue to run without having to put new management in place. Giving management a stock ownership stake can further align their interests with yours.

#3 Fundamentals lining up

An ESOP plan can borrow from the company to fund the shares. If a company has low debt load and solid cash flow, an ESOP may work.

An ESOP isn’t a walk in the park; running one does require time, effort, and money on the part of the company. Aside from strengthening the alignment of interests, doing any internal sale can be far less expensive than dealing with a business broker.

Let me know if you have any questions on this.