When is a Partial ESOP a Smart Option?
With all those caveats, there are certainly occasions when a partial ESOP sale is the best way to create a liquidity event. Here are a few examples of situations in which the seller should consult with an expert to determine the right minority shareholder stakes to sell to an ESOP:
- When your majority ownership stake supports strategic business opportunities. In some cases, small-business grants and other special opportunities are extended to minority-owned and/or woman-owned businesses. Companies that rely on these benefits should carefully consider whether employee ownership could become an obstacle to future opportunities.
- When your employee headcount makes compliance testing especially challenging. For companies with an interest in becoming 100% employee owned, a partial ESOP may be the best way to demonstrate your commitment to employee ownership. And over time, as your company grows ESOP regulatory requirements may become less of a challenge to meet.
- When your industry requires a special license or certification to be held by the owner. States may have specific requirements for certain businesses to be owned by a licensed professional within that industry. (For example, California requires that only certain licensed health professionals may hold a majority ownership interest in a medical practice in that state.)
The Upshot: Consult With an ESOP Expert Before You Choose
We say it all the time, and that’s because it’s true: no two ESOPs are the same. There are good reasons for choosing to create a partial ESOP, and there are a few reasons to look twice and consider going all-in from day one.
The right answer for you depends on your personal, financial, and business goals. Your trusted ESOP experts should be willing and able to guide you through the process of evaluating your options without a bias one way or the other. If you’re feeling hesitant, that’s a sign you need more information.
At ESOP Partners, the process starts with a no-cost, no-obligation ESOP consultation. Get started scheduling yours today by clicking the link below.