ESOP Feasibility Studies
An ESOP feasibility study can determine if an ESOP is right for your company and help engineer the appropriate design for success.
An ESOP feasibility study, or transaction analysis, is an important first step in providing shareholders and key advisors with the information they need to make an informed decision and determine if an ESOP is the right liquidity and succession strategy to achieve the desired goals and outcomes.
What is an ESOP Feasibility Study?
An ESOP feasibility study analyzes key concerns, such as:
- Anticipated range of value of the company for ESOP transaction purposes
- Transaction structure(s) for the purchase of shares from shareholders
- Available finance and funding structures to acquire company stock from shareholders
- Debt capacity, including availability and key terms and conditions of potential senior and/or seller
financing to be provided in the transaction - Impact of an ESOP transaction on the company’s cash flow and financial position
- Analysis of sellers’ tax-effected cash flow resulting from the sale of company stock and the financing of that sale
- Management team and executive compensation issues, including the use of stock appreciation rights or other synthetic equity
- Structure of the internal loan between the company and the ESOP
- Comparison of S Corp vs. C Corp transaction structures
Along with assessing the impact of the ESOP on its shareholders, the sponsoring company, the employees and the ESOP itself, the company’s debt borrowing capacity and future cash flows must be considered. The goal is to create a roadmap to develop a transaction structure and price that is fair to the company’s shareholders, workable for an ESOP transaction and manageable for the company itself while also complying with the ESOP requirements mandated by the Internal Revenue Service and the U.S. Department of Labor.
Identify Elements of a Successful ESOP with a Feasibility Study
The feasibility study helps to identify the following key elements of a successful employee stock ownership plan:
- Business valuation for an ESOP transaction
- ESOP transaction structure and plan design
- Financing and funding approach, including leveraged or non-leveraged structures
- Debt capacity, including senior financing or seller notes
- Projected cash flow and the company’s financial position in an ESOP structure
- Analysis to determine seller proceeds on both a pre- and post-tax basis
- Management team and executive compensation issues
- Structure of the internal loan between the company and the ESOP
- Comparison of S Corp and C Corp transaction structures
- Employee benefit design and long-term sustainability within the ESOP structure
This process provides business owners of closely held companies with a clear, data-driven view of whether an ESOP is the right fit for their succession planning strategy.
How We Can Help You with Your Feasibility Study
Selling all or part of a business is one of the most consequential decisions you will make as a business owner. It requires balancing financial goals with employee impact and the level of control you want to retain during the transition.
Our team works closely with business owners, management teams and other stakeholders to perform an ESOP feasibility analysis to determine if a company is a good candidate for an ESOP. Through this process, the team can evaluate liquidity, financing options, cash flow, executive compensation and transaction structure to develop a tailored ESOP transaction.
We also assess how your company’s operations, culture and succession planning goals align with becoming an ESOP company, and how plan design and repurchase obligations will be managed. ESOP trustees play a key role in overseeing this process to ensure the transaction is fair and sustainable.
SES ESOP Strategies helps business owners conduct in-depth ESOP transaction analyses—going beyond a basic feasibility study—to determine if an employee stock ownership plan is the right fit for their companies.