Will AI Make ESOPs Easier to Set Up and Administer?

A new NCEO paper, The Impact of AI on ESOP Transactions and Administration (PDF; also see the embedded version below), looks at whether artificial intelligence (AI) will lower the costs of setting up and administering an ESOP. Generative AI is seen as a potentially transformative technology in part because it promises to reduce the time and expense needed for service-intensive projects. Selling a business to an ESOP is certainly service-intensive, and finding ways to make the process quicker, easier, and less costly would be a real boon for selling business owners.

How much of a difference can AI make for ESOPs? As with most of the promised benefits of AI at this point, it can be difficult to separate hype from real hope. Predicting the future of a new technology in any detail is impossible. AI is moving especially fast; trying to foresee AI’s impact on ESOPs or anything else would be an act of arrogance more than insight. Still, we can describe where the consensus of opinion lies right now. We believe the most likely scenario is that AI will speed up and improve some tasks but will not significantly reduce costs or the time required to do ESOP deals and to handle the annual tasks of ESOP companies.

AI will help perform feasibility studies. It can quickly analyze and model multiple scenarios, often more comprehensively than is currently available. That could help companies find the most optimal approaches. Companies will still need professional advisors to help them walk through the options and, as with anything in AI, evaluate when the program may be hallucinating or missing key issues. A more difficult task will be when AI is mostly right, but the few mistakes it makes may be less obvious, but no less important. It could be that AI will produce better results, but not significantly cheaper ones.

This is even more true for legal services. AI will be very helpful with document preparation and deal structure analysis, but studies on AI and legal fees in general have shown fees going up because of AI, not down. Because legal mistakes have major consequences, considerable time has to be spent interpreting and verifying AI output. The quality of services may improve, but the price is not likely to do so.

AI can also help appraisers gather and analyze data more quickly. But much of the appraisal report is based on extensive conversations between appraisers and clients and on making judgments based on data. Trustees are not likely to rely on work products based mostly on AI because the potential legal liability is too high.

AI has already been used to generate repurchase obligation software. While this software allows companies to do in-depth analysis that might have been difficult without it, it has not lowered the cost of doing the studies.