What actually happens during an ESOP transaction?
Part 7 walks step-by-step through trustee selection, due diligence, negotiations, and closing mechanics.
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Video Transcript
Welcome to ESOP Boot Camp Part 7
Hi everyone.
Welcome to the official ESOP Radio podcast.
We’re at episode seven of the Esop Boot Camp.
Today we’re explaining how an Esop transaction actually works.
Hope everyone’s doing well.
Let’s go ahead and dive in.
So we’ve gotten
to the exciting place of actually making this whole Esop happen.
We’ve figured out your value range, how much you want to sell to the Esop,
figured out the financing piece and the overall structure of the deal.
For building a house, we’ve created the blueprints, the design.
Now we’re ready to interview contractors and make this thing happen.
So that’s where we’re at in this process.
Today’s episode, you’ll learn how the whole process works.
Who represents the ESOP trust?
The question you might have is, okay,
I’ve been working with my Esop advisor slash quarterback.
So who are the other players?
The other players are Esop trustee.
Who is the food of the Esop, their counsel.
Some trustees out there have their own in-house counsel.
Some don’t. And also their appraiser.
So the big picture there’s going to be three parties representing the Esop trust.
And they are sitting across the table from us in negotiations.
Their whole job is to
Trustee fiduciary responsibility
ensure that the trustee pays no more than fair
market value for the company stock that the esops acquiring.
And to make sure that the Esop is operating
under all the rules Department of Labor, IRS, RSA, Free Code and so on.
So how is the trustee team hired?
Selecting the trustee team
And that’s our role as the quarterback.
Here is how quarterback is going to line up appropriate
Esop trustee members according to geography expertise size.
Larger companies go for the institutional stake.
Large banks, etc.
that have their own trust departments smaller to lower midsize companies.
Maybe they’re looking at more
sophisticated independent trustees and so on.
There’s a whole marketplace out there.
Our job as the quarterback is to line up appropriate people who are the right fit
and also culture fit, personality, expertise and so on
to make sure that we’re going to get to a good deal.
Due diligence process
Once you and your board have decided which trustee team you ought to go with,
they get engaged and they start due diligence in the context of many.
Since we’ve done already all the initial Esop fit analysis,
we already have a data room set up.
So guess what?
That trustee team gets access to that data room.
Likely the what additional information as well.
So you your CFO often through these transaction processes
the CFOs do a lot of heavy lifting will be uploading
you know current financials legal documents, you know, and so on.
If you have existing counsel, general counsel,
they do play a role in this as well.
Due diligence takes place that can last anywhere from, you know, 48 weeks
to longer depending on, you know, timing and availability of data and and so on.
Negotiating the transaction
Once the trustees team is ready to negotiate, then your Esop
advisor kicks off negotiations, and that’s when the whole thing starts.
So on your side, you’ve sketched out working with your Esop quarterback.
The value range is your quarterback is also raise financing.
Now we need to negotiate the deal and make it real.
Negotiations take place usually there’s several terms of the term sheet.
So you have to be patient there.
It’s much different than
say you’re
negotiating a contract with a client or a new customer.
Sometimes there’s numerous turns back and forth, such as price
roll terms, quantitative components, interest rates, qualitative.
What does the governance look like once we get to an exit place
that is acceptable to you as a seller and the trustee
representing the trust, then we can move forward with close.
What happens at closing?
And what happens in close?
I give an example $50 million transaction.
Example: $50M ESOP transaction
Let’s assume that we negotiated that as the final price.
And we raised 20 million of bank financing.
The bank comes in and closes and funds 20 million.
And what about that other 30 million while you’re carrying that as a seller?
Note in this example that closed bank funds 20 million to the company.
How many funds?
29 to the Esop and then leaves office cutting you a check for 20.
That gives you liquidity for reinvestment.
If you’re doing the tax deferral that we talked about earlier, or
you have the
cash to do whatever you want, and then 30 million is that seller.
No piece there
that we talked about in earlier episode.
That is it in a nutshell. There’s more to this.
But I hope through this episode that you’ve learned how it works.
Why ESOP negotiations are unique
We always tell people that it can be a bit of a different negotiation,
because in essence, you and your board are hiring your counterparty.
You’re sitting across the table where negotiating back and forth.
We’re helping you trustee you on the other side with their team.
But then once we get to price in terms everyone is on the same page,
13 on the same side as well.
Have an awesome day. Thank you for joining us.
Reach out to us on LinkedIn. I’m Trevor Gilmore, CEO of Menke.
You can
check out our LinkedIn page or website.
We have information about ESOP-FIT analysis.
That’s our first step.
Also a lot of client case studies and Esop news.
After the transaction closes
Join us for episode eight.
What happens after that?
You saw transaction. Take care everyone.
Key Players
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Sell-side advisor
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Trustee
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Trustee counsel
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Independent appraiser
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Each party serves a defined role.
Due Diligence and Negotiation
The trustee conducts diligence and negotiates transaction terms to ensure compliance and fair market value.
Closing the Transaction
Funding typically includes:
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Bank debt
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Seller notes
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Governance changes
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Continue the ESOP Boot Camp Series
This episode is Part 7 of the 10-part ESOP Boot Camp series.
Next:
ESOP Boot Camp, Part 8: Who Works for Whom in an ESOP Transaction?
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.
