For business owners considering their succession plan, the question is no longer simply whether to sell the company or engage an “heir.” More and more, business owners are asking whether an ownership transition can do more: provide liquidity, preserve the company and culture they built and give employees a meaningful stake in its future.

These considerations are driving renewed interest in employee stock ownership plans (ESOPs), across the country. According to the National Center of Employee Ownership, more than 6,600 companies sponsor ESOPs‡, with plans holding more than $2 trillion in assets. In 2023, 309 new ESOPs were reported, adding more than 56,000 active participants from the previous year.

However, for an owner, choosing to leverage an ESOP is only the beginning. The more important question is whether the transaction can be structured to accomplish your goals without limiting the company’s ability to grow.

The financing structure matters

An ESOP transaction is not simply a matter of determining what a company is worth and borrowing enough to fund the purchase. The financing needs to balance the owner’s objectives with the company’s ability to support debt after the transaction. Depending on the circumstances, an ESOP may combine senior bank debt, seller financing, mezzanine capital or other sources of funding.

That flexibility can make a meaningful difference to an owner seeking liquidity while also preserving the company’s ability to invest in growth.

There is no one-size-fits-all ESOP financing structure. The financing needs to reflect what the owner wants to accomplish, but it also needs to leave the business positioned to succeed after the transaction

Start with three priorities: Cash, control and flexibility

Every business owner approaches succession differently. Some want maximum liquidity at closing. Others want to remain involved in the company or retain some operating control after the official sale. Still others want to minimize leverage so the business can continue investing in people, equipment and growth. Those priorities should drive the financing strategy—not the other way around.

In my experience, cash, control and flexibility are three central considerations to structuring an ESOP transaction. The right financing can help balance the owner’s anticipated liquidity with the company’s future capital needs. This crossroads is where an experienced ESOP lender can make a difference.

A lender with a track record of funding ESOPs can walk through multiple options, including structuring transactions using senior bank debt, seller financing and other sources of capital. In many transactions, bank financing is combined with seller subordinated notes, with the mix determined by the company’s cash flow, the owner’s objectives and the overall transaction structure.

The best structure is the one that works after closing

Reaching the finish line in an ESOP transaction is important. Making sure the company is positioned to succeed afterward is even more important. The financing structure needs to account for what happens after the transition.

  • Will the company still have adequate working capital?
  • Can it continue investing in equipment and technology?
  • What happens if an acquisition opportunity emerges?
  • How will interest-rate changes affect cash flow?
  • Will the company have the flexibility to support future growth while meeting its financing obligations?

These are questions an experienced ESOP lender can help address before the transaction closes.

Experience can create certainty

For business owners, a bank’s experience and execution are important differentiators. A lender familiar with ESOP transactions understands the mechanics, the parties involved and the financing considerations that can affect the outcome.

An experienced lender should also have the capability to offer individual ESOP credit facilities to larger syndicated transactions, so financing can scale with the complexity of the opportunity. The right capital provider can bring experience structuring complex transactions, tailor financing to the owner’s goals and provide resources to support the business long after the transaction closes.

With decades of ESOP financing experience, UMB helps business owners evaluate those choices and structure financing around what matters most: cash, control and flexibility today, and the financial strength to build what comes next. UMB’s approach is designed to support the broader financial needs of an employee-owned company, including revolving credit, capital expenditure and acquisition financing, refinancing, treasury management and interest-rate risk management.

That broader relationship can be especially important for owners who don’t want to trade one transaction for a series of disconnected banking relationships.

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