How Long Does it Take to Complete All the Steps for an ESOP Setup?

Posted by Aaron Juckett, CPA, CPC, QPA, QKA on Tue, Jun 29, 2021
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For many business owners evaluating exit strategy options, timing is a critical consideration.

The decision to sell to an ESOP and establish employee ownership is much more than a financial determination. An owner who chooses to set up an ESOP demonstrates a commitment to continuity, employee goodwill, and the ongoing success of the business.

Nevertheless, ESOP timing and timelines matter. A departing owner often wants to be able to predict a transition path, and employees appreciate a degree of predictability in any ownership transition scenario.

So, how long does it take to set up an ESOP?

Every company is unique and the timeline for completing the ESOP transition can vary depending on how long it takes to complete each step in the process — and that can depend on the size and complexity of the business.

Estimates for ESOP execution timelines vary. Some experts cite ranges in weeks, some in months, and in rarer cases, a company may need a few years to navigate the transition. In our experience, 6-12 months is typical, and even as little as 90 days can be realistic with the right expert guidance and engaged leadership.

Just as important, ESOPs offer a departing owner greater control over a departure timeline than other exit strategies that depend on third parties (like third party sales and IPOs, for example, which may be downright sudden or take several years to complete). It’s wise for business owners to start succession planning years before an exit (not weeks or months), and in most cases an ESOP transition certainly fits into this timeframe.

The time it takes to sell a business can vary widely depending on market conditions, asking price, industry, and other factors. It typically takes about 6 to 10 months to sell to a third party.1 Selling to an ESOP compares favorably with that — plus, the ESOP option is a friendly sale on a predictable timeline.

The benefits of predictability and control become clearer when you review the steps in a typical ESOP timeline:

  1. Complete a feasibility analysis (at no cost) to determine whether the business is a strong candidate for employee ownership
  2. Comprehensive feasibility modeling, including a company forecast
  3. Independent preliminary ESOP valuation
  4. Plan design, documentation, and implementation
     

1. Initial feasibility analysis: Measured in days

This high-level feasibility review gives the business owner an opportunity to gain a factual understanding of characteristics that make a company a good fit for an ESOP, including:

  • Number of current business shareholders
  • Current corporate structure
  • Employee headcount
  • Revenue
  • Profitability
  • Current pretax earnings and tax liabilities
  • Industry

Because these are simple questions that most business owners either know offhand or can quickly access, an initial feasibility analysis can be completed almost immediately.

It’s quick and easy to start with this initial feasibility review. Send us a request today.

 

2. Comprehensive feasibility study: Measured in days

Once feasibility has been determined, more in-depth modeling and analysis are needed to provide clarity on how an ESOP transition will affect the company and employees, and what the owner can reasonably expect from the sale. This means a closer, detailed look at the same points covered in the initial feasibility analysis.

This in-depth analysis obviously requires deeper information and access to business and tax records. It’s an important step that can help all parties prepare for conversations with commercial lenders, should the ESOP need to be lender-financed. By the end of this step, business owners should expect to know:

  • What percentage of the business they want to sell to the ESOP
  • How much liquidity the sale will likely provide
  • Whether the seller’s proceeds from the sale will be taxable
  • Whether the ESOP will be an S corporation or a C corporation
  • Whether the seller will finance, or a lender will be needed to finance the sale
  • The cost and time commitment to complete the ESOP transaction

 

3. Independent ESOP valuation: Measured in weeks

After getting a clear understanding of costs, future time and resource commitments, and expectations for value to the seller, company, and employees, company leadership works with an expert to engage in an independent valuation.

This independent, third-party professional takes data gathered on the company, customers, market, competitors, employees and management, assets, historical performance data, and business projections. They consult with company management and the designated trustee to get a clearer picture of the business and landscape, and a more concise view into the performance and projection data. A company should expect to provide at least the following items:

  • Annual budget and multi-year business forecast
  • 5 years of CPA-audited financial statements
  • 2 years’ worth of statements of income, balance sheets, and cash flow statements
  • Records of significant one-time expenses

The ESOP valuation expert uses one or more accepted valuation approaches (income, market, and/or asset) to calculate a professional opinion of company value. The work typically involves research to identify and compare similar businesses, in addition to the data gathering and interviews/meetings needed to construct a clear picture of the business.

Valuation is complex and can take time to complete. Transparency, cooperation, and a collaborative approach can make this step easier and more efficient.

 

4. Plan design and execution: Measured in weeks to months

The design, documentation, and execution phase is where expert guidance can be especially helpful to shorten a business transition timeline. Remember, an ESOP sets a company up for perpetual ownership, and it’s more than a business ownership structure — it’s also a qualified retirement benefit for employees.

That’s why it’s essential to choose an expert with a proven track record to design and implement an ESOP. A trusted advisor with significant experience can not only help ensure your ESOP is designed in full compliance with all applicable Internal Revenue Service (IRS) and Department of Labor (DOL) requirements, but also that it makes room for your succession planning and a controlled, graduated exit after your initial ESOP launch.

The amount of time needed to plan and launch an ESOP is variable and dependent on how well-prepared the business is before initiating the process, how much time various professionals have to dedicate to the undertaking, how quickly the company can provide information, and whether any obstacles are encountered if a lender is involved in financing.

 

5. Ongoing administration: Indefinite

Maintaining and administering an ESOP requires expertise, too. While a business owner’s eventual exit from the company releases them from concerns about timelines, company leaders who remain need to continue to meet ongoing administrative demands (including annual valuations, repurchase obligation studies, and other critical reporting requirements) to maintain the ESOP’s tax-qualified status and the ongoing health of the business.

You can get started exploring whether your business is a good fit for an ESOP with our No-Cost ESOP Feasibility Analysis. You’ll get a better understanding of how ESOPs work, whether your company is a good fit for an ESOP, and what it would take to transition your business to employee ownership. Just click the link below to get started.

No-Cost ESOP Feasibility Analysis

SOURCE: Midstreet Mergers & Acquisitions, How Long Does it Take to Sell a Business? May 28, 2020. 

Topics: Employee Stock Ownership Plan (ESOP), ESOP Planning

Aaron Juckett, CPA, CPC, QPA, QKA
Written by Aaron Juckett, CPA, CPC, QPA, QKA

Aaron is President and Founder of ESOP Partners and provides implementation, administration, and consulting services to hundreds of companies. He is a member of The ESOP Association (TEA) and the National Center for Employee Ownership (NCEO).

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