How to Successfully Navigate an ESOP Transaction: Insights from Two Industry Veterans
When Nick Francia and Mark Padjen walked attendees through the complexities of ESOP transactions in a recent NCEO webinar, one thing became crystal clear: having the right quarterback makes all the difference.
If you're a business owner exploring exit strategies or a CFO evaluating succession planning options, understanding how to structure and execute an ESOP transaction could be one of the most valuable investments of your time. Here's what these two advisors shared about making it happen successfully.
Why ESOPs Deserve Your Attention
An ESOP is arguably one of the most flexible exit strategies available to business owners today. As Francia explained, it's essentially creating your own buyer, which gives you unprecedented control over how much equity to sell and when. Most transactions take place in the 30-49% range or 100%.
But the real appeal comes down to two major factors: control and taxes.
Control means everything. Unlike selling to private equity or a strategic buyer, when you close an ESOP transaction on Friday, the same leadership team running the company on Friday is still running it on Monday. Your name stays on the door. Your vision remains intact.
The tax benefits are substantial. Companies can operate federally and state income tax-free to the extent the ESOP owns equity. For selling shareholders who qualify under Section 1042, there's the potential to defer or even permanently avoid capital gains taxes. We're talking about savings ranging from 20% federal capital gains tax, plus a potential 3.8% Medicare surtax, plus state taxes that can reach as high as 13.3% in California.
Want the full breakdown of ESOP transactions? Watch the complete webinar here.
The Cast of Characters (And Why You Need Them All)
In order to paint a more complete picture of what an ESOP transaction looks like, Padjen laid out all the parties involved in a typical ESOP transaction. At first glance, it can look overwhelming—nine different constituencies, including trustees, valuation advisors, legal counsel, and lenders.
But here's the reassuring part: you're not hiring all of them independently.
The quarterback (often your ESOP financial advisor or investment banker) helps you navigate the entire process. Of the six professional advisors typically involved, you're really only directly hiring about three:
- The quarterback/financial advisor
- Company legal counsel (ideally with strong ESOP experience)
- The trustee (who then hires their own advisors)
The key insight? Choose a financial advisor who asks questions before proposing solutions. As Francia emphasized, the best advisors don't show up with cookie-cutter deal structures. They come in curious about your specific goals, constraints, and definition of success.
The presentation went on to cover the four stages of completing and ESOP transaction, went in greater depth on the precise role of the "quarterback" role, and gave helpful tips on how to choose the best advisor team for your needs.
The Bottom Line
If there's one takeaway from Francia and Padjen's session, it's this: ESOP transactions can be complex, but they don't have to be overwhelming when you have the right team in place.
The key is starting with an advisor who understands that their role isn't just about financial engineering—it's about understanding your goals, educating you on the possibilities, structuring a sustainable deal, and seeing it through to a successful close.
Whether you're a business owner exploring liquidity alternatives to a conventional saley or a management team evaluating succession planning options, the flexibility and tax advantages of ESOPs make them worth serious consideration.
Ready to learn more? Watch the full webinar recording to hear Francia and Padjen's complete discussion and detailed breakdowns of transaction mechanics. And if you're considering an ESOP for your business, both presenters emphasized they're accessible for follow-up conversations.
This content is based on an NCEO webinar featuring Nick Francia, Co-Head of ESOP Practice at UBS, and Mark Padjen, Managing Director at Stout. The webinar was part of NCEO's ongoing education series for employee ownership professionals.