Clarify Your Company’s Future with an ESOP Feasibility Study

Deciding the next steps for your business may be a stressful, emotional and uncertain process. There are many options for the future of the company with varying degrees of investment, involvement and time spent. While there are plenty of reasons business owners may decide to gift or sell the Company to the next generation or to the existing management or sell their company to buyers, discerning can be a difficult decision, and there is another solution to transition the business to the Company’s employees.

An Employee Stock Ownership Plan (ESOP) stands out as an appealing choice for many sellers. Not only does an ESOP offer tax advantages, but it also allows business owners to retain a level of control and involvement in their company. In addition, it allows the seller flexibility on how to exit the business to align with their goal and objections. To determine the viability of an ESOP and weigh it against other alternatives, business owners often require an ESOP feasibility study. In this article, Dan Markowitz, CPA, Boulay’s ESOP leader, maps out the benefits of a feasibility study for companies looking to transition into their next chapter.

A Strategic Tool for Decision-Making

An ESOP feasibility study is a valuable tool in providing clarity and confidence to business owners during the complex exit strategy planning process. A feasibility study not only outlines the specifics and structure of an ESOP transaction but also compares it with alternative strategies, offering valuable insights that help narrow down options and determine the best course of action. ESOP formation and implementation is the primary focus, yet a feasibility study can highlight other valuable information in this transitionary period.

1.  Comparing Alternatives: The ESOP feasibility study facilitates a comprehensive comparison of alternatives. While its primary focus is on ESOP feasibility, the study allows business owners to assess how an ESOP stacks up against other exit strategies, such as strategic buyer scenarios, private equity arrangements, or management buyouts. The insights gained here help sellers make a well-informed decision aligned with the company’s goals.

2.  Evaluating Financial Factors: Financial considerations are paramount in exit strategy decisions, and an ESOP feasibility study dives into various financial aspects. This includes projections indicating the likelihood of ESOP success and its overall impact on the company’s financial landscape. A feasibility study analyzes a variety of key financial factors, including: :

• • • • The structure of financing the transaction (company cash, seller financing, third-party financing)
      • Use of warrants and stock appreciation rights for key management
      • After-tax net proceeds projections
      • use of contingent earnouts
      • Future cash flow analysis
      • Future benefit level to employees
      • Projected annual stock prices
      • Tax benefits of a 100% owned ESOP like delayed taxation on contributions and lower rates on capital gains

Feasibility studies aren’t just about ticking boxes, but delving into various scenarios, sale structures, and plan designs to make the best decision possible for the selling shareholder and their family. This consultative approach places a premium on considering the concerns of all stakeholders, not just those of the seller, advocating for a holistic strategy that sets the stage for a successful ESOP implementation.

Helping You Get There…

By comparing alternatives, evaluating financial factors, and seeking professional guidance through an ESOP feasibility study, business owners gain the insights needed to make informed choices that align with their future objectives. An ESOP feasibility study not only clarifies the path forward, but also ensures a smoother transition for both the business and its stakeholders.

Recognizing the importance of the exit strategy decision on the future of a business, Boulay offers expertise in a variety of ESOP advisory services, including guidance throughout the ESOP feasibility study process. With participation and leadership roles in associations like the National Center for Employee Ownership (NCEO) and the ESOP Association, our ESOP advisors are well-equipped to assist business owners in navigating the complexities of ESOPs. Connect with a member of Boulay’s ESOP advisory team to learn how an ESOP feasibility study can help you get there.