Who is a good ESOP Candidate? Start with the Two “L’s”

We have written (and linked out to) a lot of content in this space about what the profile is of a good ESOP candidate. We have referred to the numerous tax advantages such as capital gains taxation to the selling shareholder(s) (rather than ordinary income treatment), Section 1042 rollovers for C Corporations and tax-free profits for 100% ESOP-owned S Corporations. And there are other financial advantages to ESOPs including the ability of the selling shareholder(s) to stay on as employees and participate in the ESOP as employees.

But the best answer for the “profile” question? A business owner who really cares about the two “L’s” – Loyalty and Legacy. Loyalty means loyalty to employees. Where a business owner truly cares about employees and wants to see them benefit from the success of the business. And Legacy means the legacy of the business itself. Where the owner could not stand to see the business be re-branded by a strategic buyer or competitor.

Caring about the two “L’s” is not a prerequisite to being a good candidate for an ESOP. But in our experience, if that is where the desire starts, it produces the best results.