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 was overvalued.
• Basically “gives” business to employees with the benefit of some tax breaks from the government.
• Financially complex.
• Makes the company a less attractive target for future sale/merger transactions.
• Significant benefit is lost if an exit transaction occurs before the ESOP debt is extinguished.