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Key Takeaways
- An ESOP feasibility study is a critical step in the ESOP transaction process, ensuring your Employee Stock Ownership Plan aligns with your objectives –assessing valuation, liquidity, tax implications, employee benefit level, and structural fit.
- The feasibility study allows you to evaluate and compare alternative ESOP structures, demonstrating how each option affects liquidity, taxes, and long-term cash flow, resulting in a customized ESOP to meet shareholder and company objectives.
- The analysis culminates in a tailored blueprint that outlines transaction structure, financial terms, tax considerations, post-transaction cash flow, and anticipated employee benefits – supporting informed, data-driven decision-making.
- By aligning shareholders, management, and advisors early in the process, a feasibility study reduces execution risk and streamlines the ESOP transaction, creating a clearer and more efficient path to closing.
Employee Stock Ownership Plans (ESOPs) can be a powerful tool for ownership transition, combining shareholder liquidity with employee ownership and long-term business continuity. While the benefits can be compelling, an ESOP is not a one-size-fits-all solution. Before committing to a sale process, owners should first understand whether an ESOP truly aligns with their company’s financial profile, goals, and future plans.
This guide explains what a feasibility study covers and how it serves as the foundation for making well-informed decisions during an ESOP transaction.
Before a Feasibility - Is an ESOP Right for Your Business?
Early screening clarifies whether an ESOP aligns with ownership objectives and company profile before committing resources.
Before commissioning a formal feasibility study, owners should first understand what an ESOP is and whether it aligns with their goals and company profile. With a bit of research, owners can determine whether an ESOP could be a fit.
Consistent early evaluation helps avoid unnecessary expense and misalignment.
What is an ESOP Feasibility Study?
An ESOP feasibility study is a comprehensive financial and strategic analysis designed to determine whether selling your business to an ESOP is a viable and beneficial option, for you, your company, and your employees.
This is the first formal step for owners and leadership when evaluating an ESOP as a potential succession strategy. The study evaluates critical factors like business valuation, seller liquidity, transaction structure, tax implications, and how the ESOP can enhance future company performance.
While not unique to the ESOP world, the term feasibility study is used consistently among ESOP advisors. While the term is common, feasibility studies can vary among providers. Generally, an ESOP feasibility study refers to a pro forma analysis, assuming an ESOP transaction is completed as of a specific date. The analysis considers the company’s ability to service transaction debt while continuing to achieve its growth goals (often the company takes on significant leverage to finance the transaction), employee benefit levels, and returns to shareholders.
WHAT IS AN ESOP FEASIBILITY STUDY VIDEO
What Does the ESOP Feasibility Study Process Entail?
The process combines diligence, goal alignment, structural analysis, and financial review to produce an actionable blueprint.
If your company does move forward with an ESOP, the feasibility study will provide valuable decision-making insights. The study is conducted solely by advisors representing your company (i.e. investment banker, corporate counsel, and company tax advisor). This will keep the study’s focus on the company and shareholder objectives, minimize fees, and streamline the transaction process.
The process generally takes six to eight weeks and includes due diligence, identification of shareholder goals, evaluation of structural and scenario alternatives, financing analysis, and the presentation of findings to shareholders. This is a collaborative process that involves fine tuning scenarios as feedback is received from the business owners. The goal of the feasibility analysis is to develop a blueprint for your optimal ESOP. Once you have the optimal blueprint, you can move forward to “execution” phase.
The feasibility study fits within an ESOP transaction process that is generally more predictable than most traditional M&A transactions. While the process itself is structured and well-defined, the Department of Labor requirement that ESOP trustees transact at Fair Market Value provides an important valuation framework.
Accordingly, during the feasibility study we will develop a Fair Market Value range that offers clear insight into how an ESOP trustee is likely to value your business.
This valuation range, combined with market knowledge of ESOP financing and lender appetite, allows the study to provide a realistic estimate of expected valuation and shareholder liquidity.
Key ESOP Feasibility Study Insights: Valuation, Tax Benefits & Ownership Structure
We believe an ESOP feasibility study should provide a full, detailed analysis that helps you decide whether an ESOP is right for you, as well as a “blueprint” for the specific ESOP structure you should pursue.
Specifically, you should know the following when the feasibility study is complete:
- Company valuation range
- Which corporate structure will best meet your goals
- How much of the stock to sell to the ESOP
- How much liquidity you will receive in the sale (i.e., closing proceeds)
- Financial terms of any seller financing that is required
- Company and shareholder tax implications
- ESOP’s impact on company cash flows (inclusive of debt service and tax benefits)
- Expected employee benefit levels the ESOP sale will provide
- Development of a management compensation and incentive plan aligned with the ESOP
- How much time and money a company should expect to invest to close an ESOP transaction
How to Structure Your ESOP: Key Decision Factors for Business Owners
Many of the conclusions reached in an ESOP feasibility study are driven by detailed financial modeling tailored to the objectives of the selling shareholders. A key example is the evaluation of C-corporation versus S-corporation structures, which depends on factors such as shareholder tax basis, state of incorporation, and company-specific tax rates.
At its core, the feasibility analysis compares the potential capital gains tax deferral available to sellers of C-corp stock against the income tax savings the company may realize under an S-corp ESOP structure. While these benefits are not directly comparable, the feasibility study quantifies the tax outcomes under each alternative, providing clarity around the tradeoffs.
For a more detailed look at these benefits, see our ESOP tax overview. Evaluating multiple structural scenarios is critical to determining the approach that best aligns with shareholder goals while supporting the company’s long-term success as an ESOP-owned business.
S-Corp/C-Corp Exhibit
Similarly, how much of the company to sell to the ESOP usually depends on the seller’s personal goals, and the ESOP feasibility study will provide the information you need to make that decision. Often, business owners may sell 30% of the company – the minimum to qualify for the powerful personal capital gains tax deferral – or they sell 100% because that results in an ESOP-owned company that is exempt from federal income tax moving forward.
Maximizing ESOP Benefits: How a Feasibility Study Guides Your Sale
The ESOP feasibility study will also evaluate potential estate and gift opportunities, management incentive plans, and many other data-driven decisions. Making these decisions as part of the feasibility study will save the business owner and the company time and expense down the road.
Ultimately, the ESOP feasibility study is a blueprint the advisors design with the seller and the company, with the goals of the seller and the long-term success of the company in mind. It ensures all parties are working together and gives you a fully vetted, actionable plan with which to close the ESOP transaction efficiently.
Discover the ESOP Advantage – Maximize Your Exit Strategy
Selling your business is a major decision – why not choose a strategy that maximizes your proceeds, minimizes taxes, and secures your legacy?
Fill out the form below to contact our expert ESOP advisors today. Let’s discuss if an ESOP is right for you.
Frequently Asked Questions
What does an ESOP feasibility study achieve?
An ESOP feasibility study evaluates valuation range, liquidity outcomes, transaction structure, tax implications, and post-transaction cash flow to design an ESOP to fit with shareholder and company objectives.
How long does an ESOP feasibility study take?
The feasibility study generally takes six to eight weeks and includes diligence, goal alignment, structural analysis, financing review, and presentation of findings.
Who conducts the ESOP feasibility study?
The study is conducted by advisors representing the company, typically including an investment banker, corporate counsel, and tax advisor, to focus on shareholder objectives and streamline the process.
What are common ESOP ownership percentages evaluated?
Many owners evaluate selling anywhere from 30% (to qualify for capital gains tax deferral) to 100% (to create a tax-exempt ESOP-owned company), depending on goals and feasibility.
How does the feasibility study inform structure choices?
The analysis compares various corporation structures and models tax outcomes, debt capacity, and shareholder liquidity to identify the most effective structure.
Jacob Pacansky
Jacob Pacansky is an Associate in PCE’s ESOP practice, supporting clients with detailed financial analysis across ESOP transactions, M&A, recapitalizations, and corporate advisory. He brings operational insight from his previous role at an Orlando-based distribution company, enhancing his ability to deliver practical, data-driven solutions to business owners.
