What is an ESOP Feasibility Study?

Simply put, an ESOP feasibility study evaluates certain metrics and aspects of your business to determine if becoming an ESOP makes sense. The study should answer the following two questions:

Can we do an ESOP transaction; does it make good financial sense for the company?

Consideration may include:

• Is the company profitable?
• Number of employees on your payroll. Typically, you’ll need to have at least 20 employees to become an ESOP.
• Does the company exhibit stable growth (not cyclical in nature)?
• Would the company’s cash balance remain positive while the ESOP debt is being repaid?
• Tax advantages to the company (tax-advantaged buyout).
• What is my company really worth (a simple high-level analysis)?

Should we do an ESOP transaction; is an ESOP a good choice to meet our long term objectives?

Consideration may include:

• Providing broad based employee ownership to reward employees who have/and will help the company be successful.
• Keeping the company in the local community.
• Preservation of company culture.
• Opportunity to provide equity as a means to increase commitment to the organization (increase productivity/ decrease turnover).
• Opportunity for owners to remain involved in the business (if desired) and to exit on their own terms.

If, after this initial assessment, you decide to continue on the ESOP path, Phase 2 of the study involving ESOP services providers (Trustee, Valuation, Lawyers) would focus on the following:

• An in-depth analysis of the value of your company
• An analysis of the employee benefit levels needed to support the ESOP (IRS retirement plan limits apply)
• Determining the structure of the transaction
• Financing considerations
• A cash flow analysis of your company
• After-tax cash flows to seller
• Reviewing your team of advisors and making changes if needed