Buying and selling ESOP corporations
June 2025 | TALKINGPOINT | MERGERS & ACQUISITIONS
Financier Worldwide Magazine
June 2025 Issue
FW discusses buying and selling ESOP corporations with Phillip Chou at Ambrose Advisors.
FW: To what extent have you witnessed a rise in employee stock ownership plan (ESOP) transactions in recent years? How would you describe recent activity levels?
Chou: Employee stock ownership plans (ESOPs) have long been an underutilised succession strategy, but awareness has surged due to ongoing education efforts and success stories shared among business owners. Over the past decade, I have seen transaction volume roughly double as more business owners recognise the tax efficiency, employee benefits and legacy preservation that ESOPs offer. Beyond financial incentives, owners increasingly prioritise employee wealth-building and long-term business stability. This shift reflects the ESOP’s broader appeal as a tool for enhancing company culture and sustaining business legacy. As interest continues to grow, ESOPs are evolving from a niche option to a mainstream succession strategy, gaining traction in today’s M&A landscape.
FW: What factors make an ESOP-owned company particularly attractive to potential acquirers?
Chou: ESOP-owned businesses often make strong acquisition targets due to their financial discipline, sound governance and engaged workforce. For example, ESOP companies undergo regular audits, valuations and financial scrutiny, preparing them well for M&A. ESOP boards and trustees ensure accountability and transparency, aligning with investor expectations. Employees in ESOPs are also invested in long-term success, improving performance and easing post-merger integration. With their structured financials, disciplined oversight and ownership-driven culture, ESOP companies stand out as attractive, stable acquisition targets.
FW: What are the key differences in the deal process compared to traditional M&A? To maximise value in a transaction, how important is it to engage advisers with deep experience of ESOP acquisitions?
Chou: While ESOP formations follow M&A best practices, they require additional scrutiny to ensure fairness for employees. Each ESOP has a trustee representing the ESOP Trust, the legal entity transacting with selling shareholders. The trustee and its advisers conduct due diligence to establish a fair market value range, with final deal terms determined through arm’s-length negotiations. ESOP transactions often require external financing, with ESOP investment bankers sourcing lender support to fund the deal. A well-structured ESOP maximises seller liquidity, preserves company culture and delivers long-term financial benefits. Cutting corners in due diligence or expert guidance can lead to legal and regulatory risks and inefficiencies, making experienced ESOP advisers essential. Despite involving multiple advisers – trustees, attorneys and valuation experts – ESOP transaction costs are often lower than those of traditional M&A.
“With the right planning, ESOPs remain a compelling alternative to private equity or strategic sales, offering resilience in uncertain times.”
FW: What are some of the potential challenges or problems that need to be considered when acquiring an ESOP entity? How should such concerns shape the approach to due diligence?
Chou: Acquiring an ESOP company is not only feasible but also common and there are unique considerations. First, stock versus asset purchase. Stock sales are approved solely by the trustee, while asset sales require an employee vote. Second, excise tax risks. If an ESOP is sold within three years of its formation, it may trigger a 10 percent excise tax. And third, earnout restrictions. ESOPs generally do not accept contingent payments, such as an earnout or a promissory note. Rollover equity, in the context of qualified plan assets, is possible but requires special care and consideration. Navigating these nuances requires expert legal and financial advisers who understand ESOP governance, regulatory compliance and tax implications. With proper planning, ESOP acquisitions remain attractive and achievable.
FW: How might employee relations and talent retention impact ESOP-related M&A? What factors determine how benefits packages are distributed, for example?
Chou: When acquiring an ESOP-owned company, structuring post-transaction benefits is critical to retaining talent. Options include preserving the plan with a minority ownership position, which minimises disruption and aligns employees with long-term success. Incentive stock options or synthetic equity can also replace ESOP benefits for key employees. A stronger 401(k) with employer contributions can mitigate the loss of ESOP benefits. A well-planned transition ensures employee retention while maintaining financial stability. Acquirers must carefully communicate changes to maintain trust and engagement.
FW: What essential advice would you offer to companies looking to buy or sell an ESOP-owned company in 2025?
Chou: An ESOP transaction is a complex journey that requires an experienced guide to navigate its unique financial and fiduciary environment. These include selecting an independent trustee, conducting arm’s-length negotiations and ensuring the board of directors understands its fiduciary role. Both buyers and sellers must allow for thorough due diligence and robust negotiations to ensure that deal value and terms are financially fair to employees. How to navigate excise taxes, Internal Revenue Code section 1042 elections, entity structure decisions and selling the ESOP company as stock versus asset sales also needs to be considered. Engaging experienced ESOP advisers – investment bankers, attorneys and valuation specialists – ensures a smooth, value-maximising transaction.
FW: At a time of significant political and economic uncertainty, what is the outlook for ESOP transactions? What conditions are likely to influence deal volume in the months and years ahead?
Chou: ESOPs are gaining momentum as owners seek succession strategies that align employee incentives with business stability. The shift from ESOPs being a last-resort exit to a proactive choice reflects their benefits in employee wealth-building, legacy preservation and maintaining domestic ownership of American businesses. The key drivers of ESOP transactions include demographics and talent retention, with ageing business owners and competition for skilled employees fuelling ESOP adoption. ESOPs also rely on debt financing, so higher interest rates may reduce the amount of cash at close available to the sellers, making it less attractive to those whose goal is to maximise upfront cash liquidity. Additionally, ESOP growth depends on favourable tax treatment and regulatory stability. With the right planning, ESOPs remain a compelling alternative to private equity or strategic sales, offering resilience in uncertain times.
Phillip Chou is a co-founder of Ambrose Advisors with 20-plus years of experience in investment banking and corporate strategy and development. He advises clients across various industries in the execution of ESOP buyouts, M&A transactions and consulting projects. He is a member of the ESOP Association’s finance advisory committee and serves as a director on the board of two 100 percent ESOP-owned companies. He can be contacted on +1 (949) 910 7888 or by email: pchou@ambroseadvisors.com.
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