ESOPs are often used to transition ownership in consulting and engineering
firms from the current owners to the next generation of employee/owners. These transactions are often used
as a backup to a third-party transaction.
Benefits of an ESOP
- Provides some
liquidity without loss of control.
- Allows owners to reward employees by making tax-favored contributions for the
company’s employees in the form of company ownership.
Drawbacks of an ESOP
- Does not change
seller’s risk profile.
- Seller could be liable for 15% overvaluation penalty for each year the stock
- Basically “gives” business to employees with the benefit of some tax breaks from the
- Financially complex.
- Makes the company a less attractive target for future
- Significant benefit is lost if an exit transaction occurs before the ESOP debt