Frequently Asked Questions

Employee Ownership FAQs

Common questions about employee stock ownership plans (ESOPs), employee ownership trusts (EOTs), and other forms of employee ownership, from the basics to technical topics.

This FAQ is written primarily for business owners, managers, and advisors involved in setting up or running an employee ownership plan. If you're an employee at an ESOP company looking to understand your own benefits and rights, see our articles on Working at an ESOP Company and The Rights of ESOP Participants.

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Do sellers to an ESOP get a lower price than sellers to other buyers?

Selling a business to an ESOP generally does not mean getting a lower all-in return on the sale compared to selling to other buyers. Sellers to ESOPs receive what a hypothetical third-party financial buyer would pay for the company. Only a relatively small percentage of profitable companies can attract synergistic buyers willing to pay a significant premium. In those cases where the ESOP is competing with a synergistic buyer, however, sellers to an ESOP may still come out ahead. First, sales to other buyers require the seller to pay capital gains taxes. Sales to an ESOP can qualify the seller to defer capital gains taxes on the sale. Second, ESOP sales are often structured so that part of the transaction is in the form of warrants for the seller. These warrants give the seller the right to purchase shares at the ESOP transaction price for some number of years into the future. If the stock price goes up, the warrants can be redeemed at the higher value. These and other issues are outlined in detail in Why Selling to an ESOP Often Provides the Highest Financial Benefits.

Link to this FAQ Topic: Tax Benefits to the Seller & Company