Selling a company
that is already
employee-owned.
Most ESOP advisory exists to help a founder sell into an ESOP. This is the other direction: your company is already employee-owned, and the board and trustee are weighing a sale. We advise ESOP-owned companies through third-party sales, redemptions and plan terminations.
The board runs the process.
The trustee decides.
This is the fact that reorganizes everything else. The trustee is the shareholder of record and owes its duties under ERISA solely to plan participants. The board runs the process, but no board action substitutes for the trustee's own decision on the plan's shares.
So these sales carry a second, independent approval, with its own counsel and advisor and a fiduciary whose only interest is whether participants are treated fairly. Advisors who have not worked inside that structure tend to treat the trustee as an obstacle to be managed. That is the wrong posture, and strong trustees should recognize it immediately.
There are roughly 6,400 ESOP companies in the United States, and very few advisory firms represent them on the sell side. The work means running a genuinely competitive process and, at the same time, building a record a fiduciary can defend.
Three ways out,
and a reason to pick each.
Selling to a third party is the most visible option but not always the right one. It usually turns on whether the pressure is liquidity, capital, succession, or simply a good offer.
Generally the highest value, because an outside buyer can pay a premium the trust cannot fund internally. Needs trustee approval and a documented market test. The plan typically terminates and participants are paid out.
The company buys back the ESOP's shares over time and the plan winds down, ending the repurchase obligation for good. Keeps the business independent, but the company funds all of it from its own cash flow and borrowing capacity.
Partial redemption, refinancing, or new outside capital that relieves the pressure while keeping the company employee-owned. Often right when the problem is a repurchase wave or a capital need rather than a desire to exit.
ESOP company sales,
answered directly.
Who actually decides whether an ESOP-owned company can be sold?
The board runs the process. The trustee decides. In a stock sale the ESOP trust is the selling shareholder. In an asset sale the company is the seller and the board signs, but the trustee still owes an independent judgment on the plan's shares. Either way there is a second approval, on its own timeline and with its own advisors, and no board action substitutes for it.
Do the employees vote on the sale?
Usually not, and this is widely misunderstood. A straight stock sale involves no shareholder vote at all: the trustee is disposing of a plan asset and decides as a fiduciary. Some structures do give participants a vote, and your plan document may grant more rights than the law requires. Worth settling early, because it changes the timetable.
What duty does the trustee owe, and to whom?
Under ERISA, solely to plan participants. Not the company, not the board, not management. A transaction that is good for the business but underprices the stock is a breach. And the trustee has no duty to preserve employee ownership for its own sake: continuity and jobs can break a tie between options that serve participants equally well, but never at the cost of value.
Our last annual appraisal came in below the offer on the table. Does that mean we were undervalued?
Usually not, and it is worth explaining to participants. The annual appraisal values the business as a going concern and leaves out the value specific to a particular buyer. That is why a competitive process can price above the last appraisal without the earlier work having been wrong. It does not run backwards either: a sale price does not retroactively validate an old appraisal.
What is the standard the trustee has to meet on price?
Fair market value, determined in good faith. Both halves matter: the price has to be right, and the way the trustee got there has to be a documented, defensible process. A good price with a sloppy process is still exposure. The trustee retains its own advisor, separate from the company's, for the valuation and a fairness opinion.
What happens to the S-corporation tax exemption when we sell?
It generally ends at closing. A wholly ESOP-owned S corporation pays no federal income tax on its operating income, because its owner is a tax-exempt trust. Most buyers cannot hold that status, so the company is taxed normally from the day they take over. A buyer is underwriting taxed cash flow, not the cash flow the company has been generating. Both sides should model that early, and there are elections that can recover real value here.
When do participants actually get their money?
Not at closing. Accounts vest in full on termination, but the money moves only once the wind-up has run and any escrow has resolved, and trustees often hold back a portion until the IRS confirms the terminating plan. Distributions are taxed as ordinary income, with withholding on anything not rolled over. Setting expectations on timing early is one of the more useful things a board can do.
Why do ESOP companies decide to sell?
Most often, a compelling offer. After that it is the repurchase obligation: the cost of buying back departing participants' shares starts small, then concentrates as a cohort of long-tenured employees retires. Companies that treated the early, modest cost as a baseline are the ones that get caught. Growth capital, succession and fiduciary exposure account for most of the rest.
What makes these deals harder than a normal sale?
The trustee approval runs in parallel and cannot be rushed. Trustees will not give the usual post-closing representations or indemnify a buyer, which is a structural limit rather than a negotiating position, so problems get found and fixed before closing. Escrows and earnouts are inefficient here, because the trustee will not count them when testing whether the price is fair.
Is there a tax trap we should know about before we start?
One in particular. If a selling shareholder deferred their gain when the ESOP bought the stock, and the plan sells those shares within three years, a 10% excise tax can apply, and it lands on the company rather than the plan. A cash sale is not among the exceptions, so if your ESOP is young, check where you sit before starting a process.
General information, not legal or tax advice. Plan documents and state law vary. We work alongside your ERISA counsel and tax advisors, not in place of them.
Senior attention on
an unusual transaction.
Nora T. Mahoney, Managing Director, leads the firm's work with ESOP-owned companies considering a sale or termination.
Construction, engineering and specialty trade contractors are heavily represented among ESOP-owned companies. For those, the work overlaps with the firm's construction practice, led by Chuck G. Fenske.
Before you
start.
employee-owned company?
Start with a confidential conversation about what the market would likely pay, what the trustee will need to see, and whether a sale is the right answer for your participants.