Acquisition Strategies for ESOP Companies, 4th Ed.
Discusses strategies for ESOP companies evaluating or making acquisitions.
By John Burgess, Lynn DuBois, Daniel Goldstein, Mary Josephs, Dustin Kim, William W. Merten, Corey Rosen, John Solimine, and Carter Wideman
Format
Description
This book provides a practical, detailed guide to making acquisitions in ESOP companies, which have been extremely active in the merger and acquisition market in recent years. The most important reason for this is that after ESOP companies have paid off their acquisition debt, they often accumulate significant cash and strength in the market, both through the performance improvements attributable to the ESOP as well as not having to fund federal and state income tax bills if the company is a 100% ESOP-owned S corporation. For the fourth edition (2026), the existing chapters were reviewed and updated where needed, one was replaced with a new chapter, another new chapter was added, and three new case studies were added. Also see our publication on the other side of this issue: Responding to Acquisition Offers in ESOP Companies.
Table of Contents
Introduction
1. Preparing for an Acquisition
2. Managing Risk
3. Using ESOPs in Mergers and Acquisitions
4. Should a Company Acquire or Merge with an ESOP Company?
5. Issues for ESOP Companies Acquiring Other ESOP Companies
6. A Step-by-Step Guide to Pursuing Acquisitions
7. M&A Strategy: The Essential Steps to Growing ESOP Companies Through Acquisitions
8. ESOP Company Acquisition Case Studies
9. Financing Alternatives for ESOPs Pursuing M&A
10. Should You Create a Holding Company?
About the Authors
About the NCEO
Excerpts
From Chapter 4, "Should a Company Acquire or Merge with an ESOP Company?"
There are some downsides to an asset acquisition. First, none of the key contracts that the target company has will automatically be transferred to the buyer. In many cases, a contract will require consent from the other party for it to be transferred from the seller to the buyer. If the contracts are important to the business and difficult or time-consuming to transfer (for example, government contracts), the process of doing that might make a stock purchase better. And even when the other party does not have an issue with transferring the contract to the buyer, it does give the other party some leverage in renegotiating some terms to be more favorable to it in exchange for consent to make the transfer. But the flip side of this is that the buyer does not have to assume any contracts that the seller had (barring some language in the contract that says otherwise), so where there is a contract that has become unfavorable to the seller, it may be possible to renegotiate something more favorable to the buyer going forward. The same thing is true if the business holds any licenses that are required for it to operate, if the purchaser does not have that license.
Asset acquisitions can also be disruptive to employees. First, the ones who are going to continue to work in the business will have to be rehired and onboarded by the purchaser. Their pay and benefits are subject to change, although in some cases, the asset purchase agreement requires the buyer to continue their pay and benefits at certain levels for a period after the transaction closes.
From Chapter 7, "M&A Strategy: The Essential Steps to Growing ESOP Companies Through Acquisitions" (footnotes omitted)
Two frameworks are worth keeping close when you start evaluating where to grow. The first is the Ansoff Growth Matrix, which maps growth across two axes: existing versus new products, and existing versus new markets. The four resulting paths are market penetration, product expansion, market expansion, and diversification. The further right and down you move on that matrix, the harder the deal gets. (See figure 7-1.)
The second is the Bain/Zook adjacency model, which is just a way of asking how many steps this is from what you already do well. One or two steps out, say a new geography or a complementary service line, and you can usually lean on existing customer relationships, vendor networks, and operational know-how. Three or four steps out, and you’re essentially starting over in a business you don’t understand yet. Amazon is the textbook example of getting this right: books to e-commerce, e-commerce to AWS (built on infrastructure they already ran), AWS to logistics. Each move extended something they already had.
For ESOP companies, this matters more than most people realize. A facilities management company buying a janitorial firm is one step out. Buying a security technology company is three or four: different customers, different hiring profile, different vendor relationships entirely. That’s not growth, that’s a bet. And ESOP companies don’t have the luxury of unlimited bets. Management time, borrowing capacity, and the confidence of a workforce that has real skin in the game are all finite. Stretch too far, and you don’t just risk the return, you risk the culture and the ownership model that took years to build.
