6 Traits of an Ideal ESOP Candidate

Lazear advises clients that operate companies across a wide range of industries. From construction to healthcare and business services to manufacturing, ESOP suitability is not restricted to one industry sector, region, or size. This is one reason why ESOPs have become a popular succession plan, reaching more than 6,500 ESOP filings annually.

We’ve identified several factors that make companies particularly well-suited for an ESOP success story and enable sellers to:

  • step away from their role within a desired timeline
  • realize full and fair value for their company
  • help their employees build meaningful wealth for retirement
  • maintain the legacy and culture of the company
  • detangle their personal equity with that of the business

When conducting a feasibility analysis for our clients, we evaluate various essential factors to assess if a company is well-suited for an ESOP, including:

  • Constructive Culture for Employee Ownership:

    • ESOPs are especially successful when the moment is exciting for both the sellers and their employees. In an ideal scenario, employees and management have a constructive relationship with the sellers, such that the employees are excited to participate, and the sellers are proud to hand over the keys. Although the employees become owners over time, the idea of owning the company that they have helped build often sustains performance and retains talent. In fact, the National Center for Employee Ownership points to a study that found ESOP companies had sales growth rates 3.4% per year higher and employment growth rates 3.8% per year higher in the post-ESOP period compared to pre-ESOP performance.
  • Consistent Performance and Encouraging Management Outlook

    • The process of forming an ESOP within the seller’s value expectation becomes a smoother process when there are several years of historic financials to support a narrative of consistent earnings and reliable projections. However, deviations can be explainable with the right support such as turbulent earnings in 2020 and 2021 due to COVID-19 related disruptions. In addition to consistent performance, the trustee team and other stakeholders often seek audited or reviewed financial reporting to provide assurance for historic results. Regardless of past performance, sellers pursuing an ESOP should be confident in the company’s ability to produce sufficient cash flows going forward. Not only are management projections used to triangulate a fair market value range, but sellers will ultimately rely on the future cash flows to receive full consideration from the transaction.

We consider the following items as “nice to have” advantages for an ESOP candidate:

  • A Strong Balance Sheet

    • Starting with a clean balance sheet including responsible debt levels, healthy assets and ample cash will lead to better terms for the sellers. If the transaction requires any consents, the proforma balance sheet will raise fewer concerns if it was strong to begin with. Furthermore, senior bank financing becomes more attractive to lending partners when the company has ample collateral such as inventory, accounts receivables, real estate, or equipment. Although collateral often increases lending appetite for banks, we have worked with a long list of companies such as professional service firms that naturally operate with lighter balance sheets and still receive favorable senior financing terms. At Lazear, we take the lead on navigating existing structures and new bank financing options to source optimal terms regardless of a company’s financial conditions.
  • Resilience to Company-Specific Risks:

    • Trustee teams tend to increase a company’s risk profile if it has high customer concentration or specializes in products or services that are vulnerable to economic downturns. Lazear has a long history of success stories in obtaining full and fair value for all our clients. Whether the company is a retailer with years of steady growth or an oil field services company with volatile earnings, we approach negotiations with a compelling narrative to showcase the strengths of our clients.
  • Proven Management Team:

    • Many of the sellers we work with plan to retire within 3-5 years after the ESOP forms. Having a strong management team that will continue to lead the employee-owned company simplifies the succession planning process and typically allows the sellers to retire in due course. For companies that may benefit from stronger leadership as the sellers step away, working with Lazear includes post-close consulting to work through challenges like succession planning, board formation and governance.
  • Broad Employee Base:

    • ESOP contribution limits are set by regulation to prevent issues like the overallocation of shares to any one employee. Companies that have broad employee bases and sufficient ESOP-eligible payroll relative to the company value will have meaningful benefit levels for their ESOP retirement plans. At Lazear, we bring leading ERISA attorneys and third-party administrators to the table for a tailored ESOP plan design to ensure sustainability of the plan and the best results for employees.


1 [NCEO: 22% Increase in Closely Held Company ESOP Participants in Most Recent Data](.)

2NCEO: Research on Employee Ownership

Robby Gerlach, Director

Robby is a Director at Lazear Capital Partners in the firm’s ESOP advisory practice. He is driven by helping business owners and their employees realize value from all the years of hard work invested into a company.

Prior to joining Lazear, Robby worked in corporate finance and management consulting during his tenure at JPMorgan Chase, Charles Schwab, and PwC Advisory, respectively.

Robby graduated from Miami University of Ohio with a BS in Finance and holds an MBA from the McDonough School of Business at Georgetown University.

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