Strategies for Selling to an ESOP

​​If you're considering selling your business to an employee stock ownership plan (ESOP), you probably want to understand how the transition will affect your role as owner, including your decision-making authority and workplace relationships.

ESOPs are an attractive option for succession planning, and may help you meet other strategic goals. They also allow you the flexibility to remain as actively involved as you desire, rather than immediately handing over leadership. Here are the most common ESOP FAQs we encounter.

How does a CEO’s role change under an ESOP, and to what extent can they remain involved in the company after the transaction?

One important advantage of selling to an ESOP is the flexibility it offers for succession planning. It empowers the company to plan for the future, no matter what role the owner wants to take on. In many cases, owners remain in their current roles in the short term, begin identifying the next generation of leadership, and gradually prepare the company for their exit.

Daily operations tend to change very little, if they change at all, during an ESOP transaction.

One of the main benefits of an ESOP is how much flexibility it affords as you near your exit—the kind of flexibility traditional M&A can’t come close to matching. Selling to a third party gives owners little say, but an ESOP gives almost total oversight.

What roles do the board of directors and employees play in the ESOP?

Similar to other businesses, ESOP-owned companies are governed by a board of directors. An independent trustee is the legal shareholder who acts as a fiduciary, and who then appoints directors to serve on the board. This includes figures who are both internal and external. Their roles include:

·   Protecting and preserving shareholder interests, like any other board.

·   Identifying and ensuring the execution of strategic plans

·   Monitoring, hiring, and evaluating company executives

·   Assessing executive compensation structure

·   Monitoring the ESOP trustee

·   Reviewing key corporate transactions 

Highly successful ESOPs understand the value of independent directors with relevant business and industry experience. These experts offer ideas, relationships, and support that can help the business become or remain an industry leader.

Will an ESOP give employees too much control?

Some owners worry that an ESOP will give employees too much control, and that they will use it to make unreasonable demands. The reality is that ESOPs change daily operations very little. But a culture of employee ownership is actually a good thing that encourages employees to invest in the company and work toward its success. Owners do not need to micromanage the process, because an ESOP is not a threat to their power.