One of the biggest reasons business owners struggle with exiting their business is getting a grasp of all the options available to them. Often, the business owner’s most significant financial asset is tied up in the value of their business. Maximizing the sale price upon exiting the company is a goal of most business owners, but there are typically many other concerns: 

• How will a sale affect the employees?
• Will the owner still be able to work?
• In cases where there are minority shareholders, how are they dealt with?
• Will the company name remain intact if sold to a third party?

The answers to these questions can be much more apparent if the business considers a sale to an ESOP.  But is your company a legitimate candidate for an ESOP? ESOP Experts provide varying answers to this question. Based on our experience, we believe the following are key areas to consider:

1. Number of Employees

Although there can be exceptions to this, a company should have at least 50 employees to launch a successful ESOP.

2. Type of Employees

The employee base should be primarily made up of full-time workers. Companies with consistent employee turnover are not good candidates.

3. Management Team

The company will need to have a strong management team. Although a selling owner can still be involved and even be running the company, an ESOP transaction will be hard to complete without a strong management team behind the owner. 

4. Limited Existing Bank Debt

Typically, ESOP transactions are partially funded by bank debt. If the company already has significant bank debt, an ESOP may not be a good option (unless the owner is willing to be the bank).

5. Consistent Positive Cash Flow

Even with the multiple cash flow advantages of an ESOP, a company wishing to complete an ESOP transaction will need to have a proven record of positive cash flow sufficient to handle the debt requirements of the transaction.

Think About Your Company’s Future with Lutz 

Exiting a business is never a one-size-fits-all decision, and an ESOP is just one of many paths to consider. For the right companies, it can provide a rare balance, rewarding the owner, preserving the legacy, and creating meaningful opportunities for employees. If your business meets the criteria above, now may be the time to take a closer look. 

At Lutz, we simplify the complex decisions that come with succession planning. Our M&A services can help you evaluate whether an ESOP is the right fit, walk you through the process, and explore alternatives if another option better supports your goals. Contact us to learn more.