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Should My Business Consider Becoming an ESOP?
Kirsch CPA Group
Jul 17, 2025
Business transitions are rarely easy, even when they are long planned. Many business owners worry about how to ensure the continuity of what they have built.
That is one reason to consider an employee stock ownership plan (ESOP). Selling to an ESOP provides a transition that lets owners play an ongoing role in their company, if they wish, and keep their team and culture intact.
The ESOP structure is not a good choice for every business, however. Here is an overview of the factors that must be considered when deciding whether an ESOP is the right succession plan for you.
ESOP Success Factors
An ESOP lets your employees share in the company’s ownership and financial success as part of a retirement plan where they earn company stock over time, as part of their compensation. It can also bring significant tax advantages to owners, and the business may benefit from the added motivation and satisfaction of employees who are now invested in the company’s financial success. It’s a choice that brings financial, organizational and cultural changes to a business and can leave it more profitable and resilient. But it’s also an expensive and complex process that should be carefully considered. While many different types of businesses can find success as an ESOP, there are factors that make success more likely, including:
- A strong management team
- Cash flow stability
- Sufficient profitability to manage ESOP debt
- Engaged employees
As an ESOP, you must be prepared to collaborate closely with a team of third-party advisors and overseers, including a trustee, a legal consultant and a valuation firm.
Depending on whether you opt for a leveraged or unleveraged ESOP, you may also have a lender. A leveraged ESOP uses bank financing or a promissory note to finance the transaction. Lenders will take solvency and EBITDA projections into consideration before approving ESOP financing.
ESOP Benefits
As the selling owner, an ESOP provides you with liquidity, tax advantages that include deferred capital gains, and the option of maintaining operational control of your business after the sale. For employees, the benefits include retirement benefits that require no employee contribution as well as the morale-boosting opportunity to contribute to the success of the firm as a part-owner.
The business can also see improved cash-flow as the result of tax-deductible contributions to the ESOP trust, up to 25% of the compensation to eligible employees.
Businesses that May Not Be a Good Fit for an ESOP
An ESOP may not be the best choice for your business. Regulated businesses like financial or healthcare businesses may require careful structuring to maintain compliance with industry regulations. In some case, regulatory hurdles may be too complex to make an ESOP a good fit. Businesses with significant debt or that require immediate liquidity beyond what the ESOP will provide should consider a different method of succession.
The determination of whether or not an ESOP is the right succession plan for your business begins with a feasibility study and consultation with ESOP specialists, including trustees, tax advisors and experts in valuation. You will also want to weigh the pros and cons of an ESOP against alternatives that include traditional M&A options.
Support for Your ESOP Transition
Under the right conditions, an ESOP can be a powerful choice. An ESOP is an investment in the ongoing success of the business you have built and in the team that helped you get there. For employees, the ESOP transition can be a significant morale boost in addition to providing a source of additional financial security in retirement.
There are many compelling reasons to consider joining the approximately 7,000 businesses across the country who have opted to form an ESOP. Among others, studies show that ESOP companies are 4x more resilient in an economic turndown and grow about 2.4% faster than non-ESOP businesses.
If you think an ESOP may be the right step for your business succession, contact a member of our team to learn more about the support we can provide for ESOP financial and tax planning.
As one of the few CPA firms across the country that is also an ESOP, the Kirsch CPA Group is uniquely positioned to help you through the process, with holistic accounting and business advisory services that will leave you well positioned for every stage of the business life cycle.
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