Why do some business owners choose an ESOP — and why do others decide it’s not the right solution?
In Part 3 of the ESOP Boot Camp series, Trevor Gilmore and Ben Spadt explore the real motivations behind employee ownership decisions. This episode examines both sides of the equation: the factors that make ESOPs attractive and the circumstances where another path may be more appropriate.
🎙️ Listen to the Episode
Video Transcript
Welcome to ESOP Boot Camp Part 3
Hi, everyone. Welcome to ESOP Radio. Thank you for joining episode three of the ESOP Bootcamp.
Topic today is why owners choose Esops and why they don’t. Our goal with this series is to give you the owner,
CEO, or CFO of a successful business. The lowdown on Esops in a quick, straightforward manner.
Because your time is valuable.
I’m Trevor Gilmore, CEO of Menke And I’m Ben Spadt, investment banking with Menke.
Since 1974, Menke has been a full service Esop advisor. We’ve seen it all from a capital raise to its structure
to regulatory compliance, to value and M&A. We’ve done thousands of Esops over the years, and as an Esop ourselves,
we’re Esop native. That’s right Ben. Today, we’ll cover three key reasons why owners like you choose an Esop
and also why they don’t. Number one liquidity versus legacy.
Number two partial versus full exit motivations. What I mean by that is selling some of your company to Esop versus selling 100%.
And number three, when an Esop is the wrong answer. And yes, sometimes it is.
All right then that’s going to kick this off. Yeah. This is a great topic today.
Why owners choose ESOPs — and why they don’t
And first of all I think we should start with some definitions. You know what is legacy.
What is liquidity in first with liquidity. You know that just means, getting some money
out for your blood, sweat and tears of owning this business. You know, there’s the pay.
You’ve received over time, but you have this asset. So how do you get cash out?
And that’s, you know, a liquidity event, as they call it? So how does one do that?
And, you know, how does one structure that, whether it be all of the company sold to the Esop or just part of it?
And then legacy. We defined that a little bit in the last episode. But for me, it means,
you know, do I want this company to exist into perpetuity as it looks and feels now, you know, obviously
it would change with the times, but what am I leaving behind? Trevor, do you have a little bit more?
Maybe you want to add to that? Yeah, exactly. Ben. Yeah. So you think legacy, right? And, you know, a lot of stuff comes up here,
you know, sometimes in the context of like, software, it actually can almost be like a bad word, you know? Right.
You know, that company has, you know, a lot of outdated legacy software, you know, in the context of business ownership and esops and so on.
Legacy is generally and very much a positive thing because it’s it speaks to your brand value, your brand promise.
What does that mean? You know, the continuity of all of that, that makes it awesome, you know?
So when you think Esop and explore that option, legacy is very much an important aspect of why you might go Esop.
Because if you care about the legacy and the company has an awesome legacy, staying independent should be one of your core goals here.
ESOPs vs. strategic and financial buyers
And out of all the various liquidity options, Esop often becomes the number one, right?
So let’s talk about how that fits in with the Esop buying the company.
You know it offers liquidity in that the Esop is buying your shares for cash or for a note.
And so you know what if there’s big offers dangling from some strategic buyer, somebody that wants to buy your, market,
whether it be a specific geographic market, or maybe you have highly skilled employees that they want to access.
Can these are compete there? I guess this is the first question. So, you know, what have you seen let’s just say
in the last year in terms of, you know, that strategic buyer that’s perhaps interested sniffing around and Howard Esop competes.
Yeah. So here’s the deal with it Esop the Esop is always going to be a fair market value buyer.
So it’s a ready market for your company shares. And of course the big question is what’s fair market value.
Well the answer is it’s an arm’s length negotiation a strategic buyer if there is one for your business.
Often, they maybe appear out of nowhere. You know, you start getting, pinged by associates at,
p firm, maybe venture capital if you’re in tech, you know, and so on. You know, who really want to talk.
Or maybe it’s the corporate dev person, you know, for some larger conglomerate,
you know, that really wants to talk and take you to lunch. You know, dinner, etc.. Right. And that’s kind of how those discussions start.
A totally different path. You know, however, the final outcome, often
can be very similar, strategic and we’ll move on here. Strategic.
So we have this in a later episode, you know, may or may not pay a higher price.
You know, often dangle a high price in the negotiations. Price gets whittled down and earn outs are talked about.
Clawbacks, non-compete, you know, and so on. Esop fair market value buyer.
Usually a pretty straightforward negotiation. It’s a negotiation at the end of the day, you know, but very transparent going in with a high likelihood of success.
That is one key difference. Going Esop versus strategic or even a financial buyer is those typically
Using ESOPs to control your destiny
have a very low likelihood often and due diligence they get blown up or as an Esop. It’s very rare for that to be absolutely.
Yeah. So you know for when you think liquidity okay. That drives you know big decision to move.
These are, you know, outside of just the mentality of, hey, you know, I really want to incentivize and reward
my employees, you know, make them shareholders by way of the Esop. Usually it’s liquidity.
Then with that partial for those are different options as well. And the legacy as well.
You know legacy is high up in terms of what you envision yourself, your company to be in the future.
Then the Esop can be very much a compelling option. Yeah. I you know, I fully agree with that.
And I think that we often see legacy taking sort of the front seat
as opposed to liquidity, that people are proud of what they’ve built, proud of the people that, work for them.
You know, it that culture piece that we touch on quite a bit. If they have that strong culture,
then, you know, liquidity or even, let’s just say the dollar figure at the end of the day matters less than that.
Legacy, you know, is my company going to be the same or better off when I leave when I sell?
Who’s going to be running it, that sort of thing? Those are very important. And I think, you know, in the last few transactions
we’ve worked on together, we’ve seen that that does take the front seat. And I think that’s that’s a pretty telling,
metric when it comes to what’s the right fit for you, is it that strategic buyer versus an Isa?
Yeah, exactly. A couple thoughts here too is the Esop is a very robust control your destiny
option, as we said in the last episode, is for the planners out there, you know, you can very much control your destiny if you, hire a firm to shop you.
The likelihood, you know, of actually having a successful transaction very low, you’re going to be locked up for whatever period you negotiate with them.
You know, six months, one year. Sometimes you see two years, including,
you know, tills etc. built into that. Right? So you’re kind of stuck on that path to go Esop,
you’re typically not going to see all the same conditions because the Esop is a much different outcome, much different process.
But it’s very much, choose your destiny and control it option versus the others,
you know? So it really just comes down to, hey, with my business, is it better off independent? Do I see my executives, management, and employees thriving
under an independent structure or not? You know, is is their IP, you know, and so on.
Or market share being part of the bigger player, that might make more sense. And then there are Esop Holdco is out there as well
that you can possibly sell to. You know, if you’re really into the Esop concept, you know, so
it really comes down to that, you know, in terms of, number one, how liquidity versus legacy
have come into the equation here on whether an Esop can make sense. Now, let’s go ahead and change gears here to a partial versus full exit.
Partial vs. full ESOP exits
You know, and often as we’ve mentioned, you have legacy and you have liquidity being one of the key
motivators driving Esops. Let’s go ahead and talk about those. And, there’s no right or wrong answer here.
It really comes down to a few things. But to kick this off here, number one is timing,
you know, so what does your overall succession and liquidity planning look like when you combine it with maybe your next act?
Maybe you scale this business up and want to do something in the future. Maybe you’re in your 50s and say, hey,
I want to plan my retirement. And then lastly it could be hey, I’m closer to retirement you know.
And let’s go ahead and you know, look at maybe a full Esop exit. So liquidity really drives you know, whether it’s a partial Esop
which we mean less than 50% Esop ownership or going 100%.
Yeah. So a couple factors there. You know, and then of course value. We’ll talk about that in a second.
And then lastly financing to. Yeah. And I you know I wanted to touch on the the timing aspect of it.
We see you know you hear all the buzzwords, the silver tsunami things like a lot of retirees that people that are at retirement age
or older and these individuals are selling their company. And, you know, typically they want to sell the whole thing
and, and retire, as it were. But we are seeing and, you know, that back me up on this, if you see it to a lot of Gen Xers
that just want to take some chips off the table, perhaps they feel that that investment is better made elsewhere,
or they’re a serial entrepreneur or, you know, any number of things. And I think that that’s becoming more and more commonplace.
Absolutely. Yeah. I’ll share the story of a recent Esop client and his. I’ve transitioned.
We did, so controlling shareholder Gen-X, the father started the business 35 years ago, and then fathers
retired and, Gen X son, you know, who is now and is
mid to late 40s, implemented iOS entrepreneur operating system.
And part of that five year plan was going Esop. So the first focus on iOS got that up and running
Real-world example: partial ESOP transitions
and then hired us to do the initial Esop fit analysis, figuring out the structure, what made sense.
We settled on a 49% Esop structure. So minority what that did is got
some liquidity for the father, got some tax benefits for what the father and the company
tax benefits are going to be in one of our subsequent episodes. So stay tuned for that.
And with combined with iOS and iOS has that, ownership mentality.
Esop makes it happen. So, you know, you have this culture that has an ownership mentality working towards their one, three, five year goals here and ten.
They have a pretty awesome ten year growth plan. And the Esop is the capital structure that’s
going to make this whole thing happen. So that was really fun to execute. We raised bank financing and got them, you know, with a growth
oriented lender to help them grow the industry. They’re in heavy construction, you know, so thick, roadways, heavy pipelines, etc.
all over California. Song was a fun one. And it’s kind of a puzzle. Right? So when you think about this is like, okay, they could have went 100%,
but it didn’t make sense. I think they will in the future though. But right now the 49% structure made the most sense.
A couple pieces I want to pick out there. One, probably the easiest we could talk about this.
The short, as you said, you know, they’ll probably go 100% down the road. So I don’t know that a lot of people realize that
if I sell 49% as this company did, that’s not the end of the road.
You know, a lot of people refer to it as getting a, say, a bite at the apple. So if I own 100% of Benko and I want to sell to an Isa,
but I sell 49% right away because I still want to make and maintain control, all of that,
that does it, you know, maybe ten years down the road when I’m a little bit older, like, okay, I want out, I want to retire, I can sell the remaining to it.
And I don’t think a lot of people realize that we could go anywhere from even if you sell 10% the first time, you could sell 20 more.
And now we’re up to 30. You know, you can stair step it. And, I think that’s an important thing to realize.
They are each individually their own transaction, but they follow the same pattern, the same flow.
You could probably even use the same team if you wanted to. But then with that is the financing, you know, we
and you specifically had to raise by bank financing for this. Let’s compare and contrast, 100% deal
versus, minority deal that involves bank financing. And then let’s say we don’t want to use the bank.
What what that, you know, so for this, instance, Examp
example with 49% and bank financing, talk talk me through how that kind of works.
Financing decisions and seller notes
Yeah, exactly. So, you know, the question whether to go to bank financing or not. And we’ll cover the whole financing aspect of Esops in a subsequent episode here,
but I’ll give the TAVR the high level here. So, the big question is liquidity needs, you know, so
if you want it to still like a sell and if you have reinvestment requirements, unless there’s a bunch of excess cash on the balance sheet,
the only way you’re going to achieve that in this off sale is make financing. So in this case, being financing was a must.
And plus they needed a new banking partner anyways. They were working with local bank and when I spoke with them about Esops,
they basically try to convince them to not go. So I think that it’s kind of kind of, red flag there, you know, so on.
But in any case, we set them up with a very much a growth oriented
nationwide, but, very much, regionally focused bank.
And, you know, they’re helping with CapEx, you know, so on. So anyways, it’s going to be a good partnership.
It has been for the past one plus year moving forward. It’s going to be a great one. But that’s the overall decision.
When you start off with bank or no, it’s not required no matter what people tell you, some people in the industry say,
oh, you have to get bank financing. No, no, it’s not required at all. It just comes down to, hey, what is your personal
liquidity requirement and reinvestment requirement? So, again, we do a lot of bank financing.
Flip side, if you do no bank financing, then you’re looking at carrying a seller note.
And what that means is you’re going to get paid back over the course of whatever the horizon is with a market rate interest.
So some sellers say, hey, I’m bullish on the company and I’m fine with carrying that risk.
Meaning, you know, I’m fine with selling 49% or even 100% to the company and financing the whole thing on my own
and having the company pay me back via its cash flows. And I can act as the bank, you know, and also earn that return.
Right. So that is, very common as well with these deals.
You know, and in our results, that analysis, we do very much a deep dive, you know, so that you make the best decision possible.
Yeah. But that’s that’s it, you know, and, if you compare contrast 49% to, say, 100% sell, you know, I give the example of the 49%.
Now, when we think about 100%, we done numerous of those, of course,
you know, in our 51 year history, the past couple of years, we’ve done,
you know, numerous as well, you know, the 100% share the story of, general contractor, in California and,
speaking about that initially, he’s the son of the founder, and he’s now
in his mid 60s and in his late 50s, he started getting approached by a lot of PE backed construction tech players,
you know, kind of, went down that path and then realized, hey, this isn’t the right feature for the company and then
contacted us back in 2022, late 2022. And then we compare and contrast the Esop
100% option, and we showed him 49 and 30%. Long story short, we settled on 100% Esop
transition and overall price that he got all in, you know, is very comparable to what he was seeing on those other offers.
And the benefit to is some of those construction tech plays of belly of Bancroft past couple of years.
Right. And that would have been such a horrible endgame for this company.
That’s been a business since 1960. Right. You know so Esop is let them continue.
Employees have skin in the game. He’s very proud as well. He’s still involved in the business.
Still is on the board and so on. And you know, the company still has that culture as well, in place.
So it’s overall been a win win. So overall the decision to go minority, which we mean below 50%.
And the reason why it’s called minority is that the Esop in is a minority shareholder versus 100% control.
Pre-fund ESOPs and timing considerations
It’s very much a nuanced decision. It’s not you must go 100%, you know, or not.
I know some players in the industry like to just pitch 100% or nothing, you know, because, you know, if you make a percentage,
fee, right, you’re going to get a bigger payday that way. But sometimes it doesn’t make sense. And, you know, we’re, totally indifferent.
What we do is do a holistic overview of cash flows, what your goals and objectives are, where the company is today,
and help you figure out what makes the most sense there. Yeah, it’s very much based on the company’s goals and objectives.
You’re absolutely right. And, you know, I think, you touched on some great points there that,
that liquidity piece is, is very important, but also the legacy
that is that exists and you want to continue to exist. One other piece that we often run into is
people are interested in the Esop idea. The company looks like a good fit, but
we’re not quite sure about how to make it all work. And sometimes in that instance, because we’ve spoke about before,
a recent is a qualified retirement plan. So we, you know, do what we call a pre fund option where we set up the plan
itself, the Esop itself, but no shares change hands at this point.
The company then makes annual cash contributions to this retirement plan. And built up cash that eventually, within
five years, as per regulations, buys the shares from a selling shareholder and uses that cash,
then either bank financing or seller financing. If there’s additional funds needed to get the shares in the hands of participants.
And we see that sometimes that makes sense. If your growth
trajectory is such that you know, I feel like it is a good idea, but we’re going through a time right now where we’re kind of stair stepping growth,
having these leaps and bounds or, you know, any number of reasons. And I think that it can be an effective tool to roll out that Esop.
Now get the employees have been educated about it
and, you know, start to enjoy some tax benefits as well. But, you know, there are cons and I think,
you know, once the cash is in the plan, it has to stay there
unless you turn it into shares of company stock. So there are some pitfalls there.
Trevor, I don’t, I can’t really think of, of anything else other than trapping the cash there.
Yeah. That’s you know, and give it a couple examples here.
So we set up a pre fund Esop and you know and I don’t know if a lot of people in industry
do this or not. You know we’ve been doing this for a long time because it makes a lot of sense. You know you think okay, what is an Esop.
And at the end of the day it’s just a retirement plan. Right? And a lot of the industry focus is on the transaction,
you know, in terms of the Esop actually buying the stock. But it’s two different things. The Esop itself, which is housed inside of the is not an employee stock
ownership trust is just that is a retirement plan. So part of what we do, and since we have the capability to do this is a SMB like,
okay, let’s say your companies that say 1.5 mil EBITDA today. But you know, you want to get to three to 4 to 5 and then sell to the Esop.
You don’t need to wait. We can set up the Esop today. Every year the board can decide how much cash
you want to contribute to that Esop. And then what happens is,
number one, when you make that decision to have a set it up, we do the employee roll out, tell the employees what’s going on.
You get them jazzed and excited about the future of the business, saying, hey, this is the direction the company’s headed awesome by me end, right?
You know, and so on. So that’s a huge benefit, you know, to once the company decides
how much cash it wants to contribute, you know, and it’s not setting itself up for any commitment, you know, it can decide to contribute
nothing or, you know, up to 25% of eligible pay. Right? You know that that wiggle room there, gets the tax deduction.
So I just kind of give an example there. Let’s say you and I decide, hey, let’s contribute 1
million to the, Esop radio Esop trust fund, you know, next year.
So what do we get? We get $1 million tax deduction and now there’s $1 million in that Esop trust.
Guess what? All the employees of Esop radio get a statement showing their piece of that pie.
So this can continue for up to five years. And then the Esop can use that cash
as a down payment to buy Esop radio stock.
Yes, it’s a it’s huge because it basically allows you to get the Esop set up an out of the way focus on performing and also in that Esop ecosystem as well.
You know, in those situations, we’re sitting there monitoring value the whole time. And you know, really plugged in with the company and, you know,
figuring out, hey, when does it make sense to transact, you know, so on. And then when it does it’s like,
okay, do you do 30%, you know, how much do you do? Right. So we’ve done it.
Give two examples here. Consulting firm up in the San Francisco Bay area. They pre fund for four years and they did 100% transaction last year.
And then Phoenix, Arizona, successful electrical contractor basically bought this company from the founder in 2022.
Hired us to do a Esop in 2023. Pre funded for a couple years and then did a 100% transaction.
And during that time, him and his team built the company from 2 to 9 mil EBITDA. Super impressive over a very short period of time.
And his whole goal with that is you can find this company he’s SP finance in. And when 100% Esop and it built it from 2 to 9
such a success story fun one. So a lot of options there.
And of course, the idea here is not to shove one solution down. It’s like what makes the most sense, right, for for you, for the business
and the future of the business and design a structure around that.
You’re absolutely right. It’s not all about the numbers. You know, we do a lot of heavy analysis when it comes to
whether it’s the Esop fair or we do some benefits analysis. We do a lot of number crunching.
But if it’s not a fit culturally or as part of your legacy succession plan, whatever.
And it doesn’t make sense. And I’ve been avoiding this the entire episode. But how do we judge when an Esop is the wrong answer?
When an ESOP is the wrong answer
Our final topic you know, there are times where somebody will come to us
and say, you know, hey, I want to sell to my employees, I’ve got XYZ company. We do a couple million dollars in Ebit.
And we say, okay, well, let’s, you know, let’s take the first steps, let’s do it.
But we find out, you know, a few things along the way that make it not a good fit.
You know, we commonly see that it might not cash flow at that 2 million and EBITDA was this year, but maybe next year
it’s only going to be 100,000, you know, things like that. Additionally, maybe
this is what we call a hobby or lifestyle business. And I refer to it as, you know, this person owns their job.
Yeah. You bring $2 million to the bottom line. That’s amazing. You know, you built this business up, but if you’re gone, everything’s gone.
You know, we’ve talked about this before. You’re driving the the ship here because every contract comes through you.
Every decision comes through you. And then once you leave,
you know, all your customers might find another vendor or what have you or another, contractor.
So sometimes that’s an unfortunate instance. Yeah, exactly. Yeah. You think, you know, that kind of situation, you know.
Okay. What is the true intrinsic value of that company? Right. And, you know, it’s a hobby, lifestyle business.
It’s like intrinsic values, to support your lifestyle. Right? You know? Yeah. You know, you having fun doing this.
So, you know, that’s enterprise value. And can you build a hobby or a lifestyle business into an enterprise? Absolutely. You know, I know you and I are both car buffs.
You know, I think I bring a trailer economy to the car auction website, right? I mean, you’re I kind of started off very much, you know, back in what, 2007
as that, you know, now it’s, you know, owned by Hagerty’s. Right. And yeah, it’s huge.
And so, you know, you can definitely still do that. And I think that’s a very good point, because we have seen companies
that have started in garages or sheds, you know, from if you’re a, custom machinist or something like that, that have turned
into successful companies that have turned into successful use ups, but we’ve also seen companies that have started in sheds
that didn’t amount to anything other than that person’s job. Essentially their career, their livelihood.
Exactly. I would say to, okay, so, you know, we covered these one big one. And a lot of it comes down to value, right?
And as we always mentioned, you know, you and I both have valuation accreditations seeing hundreds of years that valuations M&A valuations and so on.
You know values always a range right. It’s not one number. It’s not your business is worth 20 million a year.
You know whatever the case is. But one
key reason why I need, I might not make a lot of sense is if you can sell for a much higher price in the open market, you know what I’m saying?
Hey, think like an AI or tech company, right? You know, you have these companies with negative earnings. You know, there were 50 billion, you know, 250 or whatever,
you know, based on the most recent VC round, probably not going to be a good Esop candidate at the end of the day. Right.
Because what makes an Esop though is cash flows. It always ties back to your cash flows.
So company you know, is worth 100 million and so on. But it’s not cash flowing. Guess what? The Esop is not going to work because there’s going to be no money
to pay the Esop dead. So that’s a big one, you know, is that,
yeah. You know, and then, next up, you know, is and we talked about this as well in the prior episodes is if your company is better off
with a larger organization and some are, you know, in the CPA accounting industry,
we’ve seen a huge, massive roll up lately, you know, with all these regional players being scooped up,
often by the large players who are private equity backed. Right. And I’m sure
every single one of those accounting firms and some do you go Esop, you know, etc.. But you know, kind of make that decision like, hey, should we go Esop or do
we need to find a cash buyer to cash out all these partners who are retiring and, you know, and so on, right.
So, you know, that kind of decision kind of comes in too. Right? But, you know, it’s sad because a lot of, you know, good names,
you know, have lost their independence, their identity, you know, in that sort of industry role of, you know, CPA firms.
That’s a big one engineering. You know, we’re seeing that across the board, you know, and so on that that’s very much, board decision.
Right. You know, what makes sense. And it always is a bit sad, you know, when a good brand name gets
scooped up and eliminated, right? You know, really. And lastly, I would say, too, is if status quo is,
you know, you don’t want to do anything, no action that’s always a option, you know, is is no action, right.
When outside buyers make more sense
You know, it’s the status quo, you know. So if that’s the case, you know then yeah, Esop might not make a lot of sense.
But I will say at some point succession planning is going to find you.
You know, it’s it’s a matter of time. Right. So you know, often you want to plan early,
know your options, be strategic about it and not have your options make the decision for you.
Whatever you know, few options you have. You know if you’re you’re in that position there. But yeah, let’s go ahead.
Because I know we’re, kind of at time here and, let’s have some real talk here about why some owners regret choosing any sort.
Yeah. So I the examples I can think of are really, you know, they got too far along in the process.
They sold maybe 30%. And then it just
didn’t work the way they wanted it to. Perhaps they what they stated as
their goals were not actually their goals. And it seemed like, you know, they were money driven in terms of liquidity.
I want the highest and best price, perhaps a strategic buy a roll up company or what have you.
And then they felt that the Esop just didn’t give them what they wanted. Do you have a more specific example that you can think of?
Yeah, definitely. And, a couple thoughts here too, before we dive into that is,
you know, overall the Esop, you know, we see sites get terminated all the time. Right? Because esops get form is created for very specific reasons.
Some of them thrive just like companies going public. You know, some stay public forever. Then you read a,
you know, a company goes public and then it’s taken private in two years. Right. You know, the Wall Street Journal is for the stories.
Same thing with the Esops. You know, it’s Esop comes in, it’s a shareholder.
It can serve a purpose. And sometimes due to, you know, changing economic conditions, industry changes,
you know, and so on, maybe it doesn’t make sense anymore, you know. So you do see that.
So, you know, again, it’s a board decision, right, to, you know, adopt or terminator for ease and ease.
You know, but I’ll give a story of, and this is very rare, but one client
who ultimately kind of regretted but then came around and accepted it. So, client side pattern here.
In his early 20s, he developed, series of pizza chains, built it up to, you know, pretty impressive,
you know, think like 30 mil annual revenue and so on. And a lot of pizzas. Yeah, exactly.
And some were at college campuses, you know, etc. and
he’s based on the, the southwest not going to give the town away, but, based
in the southwest there, you know, built a really impressive business. Once he got to his mid 40s, he approached us and was like, hey, you know, this is,
he’s part of a high net worth group, you know, learn about the C sub
option, you know, said, hey, like, let’s explore that. We did 100% Esop transaction.
He still remained the CEO. He called me two years after the deal and said,
you know, kind of having this existential crisis, like, I just feel like I need to since I’m still the CEO, I need to own the company.
So we ran the math and looked at everything, you know, in terms of him buying back the company and so on.
And it just didn’t make sense. And he finally accepted it. So it wasn’t a matter of him thinking he sold too cheap and,
you know, or he didn’t like the Esop structure. It wasn’t that at all. He really liked the employees having skin in the game.
All that was working out is just was very much, you know, a, kind of, you know, personal, mentality, right?
That, you know, he needs to be the owner. And we told the wife, you know, you’re in the Esop is he was in it. Right. And they technically are that way.
So any case, kind of, you know, worked with them and, you know, some of this kind of dude also comes into, you know, sort of psychology too, right?
I mean, most things are right, but, you know, kind of walk through it all and, you know, spend a lot of time weighing the pros and cons and what it all look like.
He finally came to accept it. And then what he did is, and this is what he planned to do all along, he went on and started another venture, you know,
which made a lot of sense because that was his goal along. So, you know, he still has ties to the pizza restaurant on the board and so on,
you know, but ended up being a win win because the company is still 100% Esop. But that was, you know, a rare call to get right.
Is that and is that a walk through peel back the onion. Right. And kind of talk this through.
So, so in a nutshell, you know, some just like, anything, you know, some companies
Final takeaways and what’s next in ESOP Boot Camp
say they go IPO, right? Sometimes they, they regret that, of course. Totally different. You know, come here that in is but it is rare most people who go
Esop are very happy that they do. So, yeah. You know, thanks everyone for joining us today.
That’s it for us, episode three. And to recap, we covered three key reasons why owners
like you go down this path and why they don’t. Number one, liquidity legacy number two,
partial and or full exit motivations. And then we also mentioned the pre fund Esop option
that we covered when an Esop is the wrong answer. Thank you for joining us.
We hope you enjoyed it and got something out of today. Connect with us on LinkedIn.
Trevor Gilmore and Ben Spadt. You can look us up. You can also find ESOO radio and Menke on LinkedIn as well.
We have real case studies and Esop news on our website, and reach out to us to learn more about our Esop fit analysis.
And as the first step in assessing if an Esop is right for you. Have an awesome day! Join us for episode four Esop Tax Advantages.
Take care everyone. Thanks and goodbye.
Liquidity vs. Legacy
One of the most common tensions business owners face is the balance between liquidity and legacy.
Strategic and financial buyers often maximize upfront purchase price. ESOPs, by contrast, allow owners to prioritize:
Independence
Cultural continuity
Long-term employee participation
Controlled succession
Understanding which outcome matters most is foundational to the decision.
Partial vs. Full ESOP Transitions
Not every ESOP is a 100% exit.
This episode explains how:
Minority ESOP transactions can provide partial liquidity
Sellers may retain operational control
Transactions can occur in stages over time
Ownership can evolve gradually
For many owners, a partial ESOP serves as a strategic first step rather than a final exit.
Financing Structure and Timing
The episode also explores how financing structure influences owner outcomes, including:
Bank financing vs. seller financing
Carrying a seller note
Pre-fund ESOP structures
Age and succession timing considerations
Transaction mechanics must align with long-term objectives, not just immediate liquidity.
When an ESOP May Not Be the Right Fit
An ESOP is not universally appropriate.
This episode addresses clear situations where:
Enterprise value may be limited
Growth prospects are constrained
A third-party buyer may create greater value
Owner objectives are misaligned with ESOP structure
Evaluating both the strengths and limitations of employee ownership is essential to responsible planning.
Who Should Listen
This episode is especially relevant for:
Founders evaluating succession options
Owners weighing strategic buyers vs. ESOP
CEOs and CFOs modeling liquidity scenarios
Advisors helping clients evaluate ownership pathways
Continue the ESOP Boot Camp Series
This episode is Part 3 of the 10-part ESOP Boot Camp series.
Next:
ESOP Boot Camp, Part 4: The ESOP Tax Advantage Explained
Explore the full series at:
menke.com/esop-radio
About ESOP Radio
ESOP Radio is the official ESOP podcast from Menke — where real stories of growth, succession, and long-term wealth building are told.
Hosted by Trevor Gilmore and Ben Spadt, the show features conversations and educational episodes designed to help business owners better understand employee ownership.
Disclaimer
This podcast is provided for educational purposes only and does not constitute legal, tax, investment, or fiduciary advice.
Phil DeDominicis is an ESOP strategist and M&A advisor who has guided 300+ companies through ESOP formations, financing, and transactions over 20+ years at Menke & Associates. He specializes in selling ESOP‑owned businesses to financial or strategic buyers and in helping ESOP companies acquire other businesses.
