ESOP Feasibility Studies and Why They're Important

If you are a business owner contemplating business succession planning, you’ve likely heard about Employee Stock Ownership Plans (ESOPs) and the benefits they can provide your company and employees. However, you may not know that an ESOP feasibility study is a crucial first step for any company ready to transition or wanting to learn more about an ESOP.

What is an ESOP feasibility study?

When a company is looking to transition to an ESOP, the first step is to conduct a feasibility study. Typically conducted by qualified consultants, the feasibility study will gauge whether an ESOP is a viable option for the company, but also if an ESOP will fit the financial goals and objectives of the company, along with its board, management and shareholders. This feasibility study phase typically lasts around 45-60 days. Some states, including Iowa, even have programs to help businesses pay for ESOP feasibility studies. Check with your state’s economic development department to see if a program exists.

What items are reviewed in an ESOP feasibility study?

During the feasibility study, many financials and various data points will be reviewed by the consultants. Common aspects reviewed during a feasibility study include:

• Company Value: What is the anticipated value of the company for the ESOP transaction?
• Financing and Funding: How will the company acquire company stock from shareholders?
• Cash Flow Analysis: How will the transaction impact the company’s ongoing cash flow?
• Employee Benefit Levels: What are the employee benefit levels needed to support the ESOP?

The feasibility study typically also includes management interviews and financial models and projections. For example, your consultants may project the differences between having your company organized as either an S-corp or a C-corp (both can be done with ESOPs).

Why is an ESOP feasibility study important?

By investing in a feasibility study at the start of your ESOP transition, you’ll have the information necessary to make an informed decision for the future of your company and employees. The feasibility study will serve as a blueprint for a future ESOP transaction and identify how that transaction could impact your company’s cash flow and financial position, helping to prepare you for a smoother ESOP transition.

If you are considering transitioning your company into an ESOP, reach out to me to learn more. ABI