When a business owner is considering whether to sell to an Employee Stock Ownership Plan (ESOP), thorough planning should be undertaken to understand the likely outcomes to the selling shareholder (s), the Company, and the soon to be ESOP participants. One of the key steps in the early stages of setting up an ESOP is conducting a feasibility study. This study typically involves a plan design component where we model a range of value of the business, along with multiple transaction scenarios incorporating numerous assumptions specific to the goals and objectives of the Company and selling shareholder(s).
What Is an ESOP Feasibility Study?
An ESOP feasibility study is a comprehensive analysis that helps assess whether a company is a good candidate to sponsor an ESOP. It considers various factors, including the financial health of the business, its valuation, leadership readiness, and more. The feasibility study is designed to provide the company owner with a clear understanding of the potential benefits and challenges associated with transitioning to an ESOP, while providing insights into the implications of various plan design features and alternative structures.
Why Conduct a Feasibility Study?
The decision to sell a business is complex, and ESOPs add a layer of intricacy. A feasibility study helps the owner address several critical and common questions, including (but not limited to):
- What is the company’s fair market value?
- What structure would the transaction take (i.e. need for liquidity, terms of financing, incentives for key people, etc.)?
- Is an ESOP financially viable and sustainable?
- What are the expected outcomes for the sellers, the company, and the employees?
- What are the tax implications of an ESOP transaction?
- How will the transition affect employees?
These studies can also uncover any potential obstacles early in the process, allowing the owner to address them proactively. This helps maintain momentum throughout the transaction, thereby avoiding the delays or challenges that can occur when hurdles arise later in the process.

Elements of an In-Depth ESOP Feasibility Study
An in-depth feasibility study covers several key areas:
1. Value of the Business
- A primary component of the study is determining the value of the company. The valuation provides a starting point to the overall process and will help inform appropriate transaction structures to continue exploring.
- During the valuation process, the cash flows available to service debt and provide for other capital needs of the business are estimated.
- The valuation can also serve as an opportunity to assess areas of the business which may be perceived as favorable or unfavorable to advisors involved later on in the transaction process. By identifying these areas of the business early on, supporting narratives or information can be accumulated and properly communicated early in the process.
2. Financial Analysis
- This part of the study reviews the company’s revenue streams, profitability, and cash flow. It helps to determine whether the business can afford to sustain an ESOP, given various transaction structures, debt levels, and other factors.
- The financial analysis also evaluates the feasibility of financing options, such as bank loans, seller financing, and other strategies to help facilitate the transfer of ownership.
3. Leadership and Management Assessment
- Successfully transitioning to an ESOP requires a capable leadership team that can manage the transition and support the new ownership structure. The feasibility study will consider the skills and readiness of current leaders, identifying any gaps that need to be addressed.
- Leadership stability is essential, as a successful ESOP often involves a gradual transfer of management responsibilities to ensure continuity and maintain business performance. As part of the feasibility study, we will include plan design elements that provide additional management incentives, including phantom equity over and above participation in the ESOP.
4. Plan Design and Structuring
- The feasibility study will outline recommendation around various components of the transaction structure, including the proportion of ownership to be transferred, financing terms, and expected benefit levels.
- This step is crucial because it ensures that the likely outcomes align with the owner’s goals, and provides shareholders and managers of the company with the information needed to decide if the ESOP is the right strategy for the business and its employees.
Implications of the Feasibility Study and Valuation
The insights gained from a feasibility study have wide-reaching implications. For example, if the study indicates that the business is not ready to sustain an ESOP, the owner can take steps to strengthen the company’s financial position, improve management capabilities, or reconsider the timeline for the transition. Conversely, if the study shows that the business is a good candidate, it provides a roadmap for moving forward confidently.
Conclusion
The findings of the feasibility study can assist in aligning owner expectations, identifying potential challenges and obstacles, and establishing a strong foundation for a successful ESOP. With careful planning and expert guidance, ESOPs can provide business owners with a business transition strategy that empowers employees and fosters a lasting business legacy. Once the feasibility study is completed, and a decision is made to proceed with an ESOP, the most important next step is to ensure that you engage the right advisor to structure the transaction and lead the process and Acuity Advisors is here to help.