ESOP Boot Camp, Part 2: Is Your Company a Good ESOP Candidate?

How do you know if an ESOP is actually a good fit for your company?

In Part 2 of the ESOP Boot Camp series, Trevor Gilmore, CEO of Menke, and Ben Spadt, ESOP Investment Banking Consultant at Menke, walk through the key questions business owners should ask to determine whether their company is a strong ESOP candidate—and the warning signs that are important to understand early.

This episode is structured around a practical, experience-based framework that helps owners evaluate ESOP fit before pursuing transaction structure or financing. The discussion focuses on financial readiness, leadership depth, culture, industry considerations, and owner objectives, with an emphasis on assessing fit realistically rather than optimistically.

Topics covered include:

• Minimum financial performance and cash flow requirements for an ESOP
• Why cash flow matters more than revenue size
• Executive and management team depth
• Culture, employee ownership readiness, and industry considerations
• Owner goals related to liquidity, control, and legacy
• Common misconceptions about ESOP “eligibility”
• When an ESOP may not be the right solution

This episode is designed for owners, CEOs, and CFOs who want a clear, structured framework for evaluating whether employee ownership aligns with their business and long-term plans.

Learn more:

• ESOP Radio: https://www.menke.com/esop-radio/
• ESOP Boot Camp: https://www.menke.com/esop-boot-camp/
• Confidential feasibility review: https://www.menke.com

Transcript

0:04

Hi everyone. Welcome to ESOP Radio. Thank you for joining episode two of the ESOP Bootcamp. Our goal is to give you the owner, CEO, or CFO of a successful business. The lowdown on Esops and a quick, straightforward method because your time is valuable. I'm Trevor Gilmore, CEO of Menke, and I'm Ben Spadt. Investment banking with Menke. Since 1974, Menke has been a full service ESOP advisor. We've seen it all, from Capital Raise to ESOP structure to regulatory compliance to value and M&A. We've done thousands of esops. And as an ESOP ourselves, we're ESOP-native. Thanks, Ben. Our second episode is an “ESOP right for you?” will provide clarity today. We'll answer five questions. Number one, what is the minimum financial performance needed to go? ESOP. Number two, how deep should your executive and management bench be? Number three, do we need a particular culture for an Esop to work for my company? Number four is my industry right for an ESOP? And lastly, number five, am I ready for an ESOP? All right, Ben, let's go ahead and dive in with number one. Absolutely. So we're talking about minimum financial performance. And a lot of times when I, you know, talk to somebody that is thinking about selling to their employees, I'm concerned with especially let's talk 100% buyout, consistent strong financials. You know, hopefully reviewed or audited. And realistically the balance sheet is clean. You know, the, there's no, credit balance on debit, you know, accounts, things like that. And then, you know, solid EBITDA. And Trevor, do you think you have like a targeted Ebit? Or then that's earnings before interest, taxes, depreciation and amortization. You have been it's very much case by case. You know, we have clients very much on the upper end of the middle market range, you know, meaning, hey, they have 30 plus million EBITDA. We have clients, you know, that are very much on the lower end of the middle market range, which generally means a few million Ebit. But usually for an Esop to make sense, you know, you're going to want to see a couple million of EBITDA, you know, and what is Ebit? You know, as we mentioned, you know, earlier, it's basically your adjusted profit, you know, and so there's no one right or wrong answer there. But we do like to see very consistent earnings, you know, generally on the upward trajectory as well. You know, and as you mentioned, a clean balance sheet, clean financials and really strong financial leadership. And you know what we can mean by that is, you know, strong controller CFO, someone with a strong accounting background. We see a lot of CPAs out there, you know, running the finance function for those good Esop companies. And, you know, things can change too, if we're talking about a minority or even a pre fund Esop, which you know, is very much setting the stage for something bigger in the future. So any thoughts there? You know, comparing contrasting to a 100% deal which we'll talk about a future episode versus, you know maybe a pre fond Esop where, you know, set it up and basically use that cash in the future as the down payment. Absolutely. And setting up, you know that even a question you just need cash flow to make anything work. So you know, having a steady or perhaps growing Ebit that's huge, whether it be 100% or, you know, a non-controlling minority interest. But for those minority interests, a lot of times what we're thinking about is the growth trajectory. Are we in a, in a phase right now as the company, are we looking forward to either revenue growth, headcount growth, which will then in turn, hopefully bring revenue growth? And then when we look at that, it gives potential selling, shareholders the opportunity for maybe a second bite at the apple. So you say, you know, I have these big growth prospects, but I don't want to lose out on that top end. But I do want to get some, you know, liquidity now or set up the Esop, get the buy in. That will help with that trajectory. So we see a lot of things like that. But we'll talk about those in a future episode like you alluded to. But one thing you said is a strong executive management team, especially with the finance function. Can you expand more on that? Yeah, exactly. You know, so you think if you're going through an Esop transaction, it's very similar to an M&A who often leads that process on the company side? You know, side of us advising the company, you know, and so on. Is the CFO right. So you see the CFO and their team VP of finance you know, controller and so on. So you know, you really want that strong leadership to go through with a control deal in place. And often we see clients hiring for that before they go to market, whether it's going to market on Esop or M&A. And lastly here, before we move on to topic number two, our projections, and this is very crucial, and especially for companies who have never gone through this exercise, is to start developing forward looking projections. And what we mean by that is one, three and five years out. So whether you go Esop or whether you go another exit, that's always going to be needed. People are always going to say, hey, let's take a look at your past performance and also what the future looks like. And you want those rooted in reality tied to your overall corporate goals, you know, and so on, you know, but it is crucial to start thinking about that. And of nosed in reality is is important, like you said, because, you know, I've, illustrated these out with some of our financial models showing, you know, based on that trajectory that you, you business owner, have outlined to me in ten years, you're going to be bigger than Amazon. I don't think that that's possible. So we're going to have to scale it back. And, you know, root these in reality, like you said. And I think that's a very good point. Yeah. Let's hop over to topic number two here. So executive and management team. So let's talk about that. So big picture going Esop or going any other outcome. Right. You know you want to minimize your key man risk. So so we continue business owners because that's who this whole series is targeted towards. You know you don't want to tell a potential choir, hey, I do everything here, right? You need to have a team in place that is capable, competent and can scale the business in the future. And that is very crucial, for value and for continuity, you know, everything. And also thinking about the future, too, right? You know, and saying, okay, what is this company look like in the next one, three and five years and really planning for that as if it's today. Now that's planning for it. Like it's today is huge because eventually it is going to be today. And we're going to have to make a move today to, to do something, you know, whether it be retire, or get, you know, take some chips off the table like we like to say, that key man risk is very important. And you touched on a couple things. One is its impact on value. So let's say it's Trevor. Trevor's engineers LLC or incorporated. So we want to set up an Esop for you. But every job comes through you. You source the job. You bid the job. You assign, employees to different tasks of the job. So what happens when you leave? If Trevor is gone and everybody's used to calling Trevor, you know, what do we how how do we think about that? And in terms of value that can diminish value. Because once you're gone, revenues might go down. Profit might go down because everything comes through you. And so it's very important to talk about when you do exit, inevitably what you know, what does the next six months look like, let alone what does the next five years look like. So it's very important to talk about those things. And putting those right people in the right seats, making sure your CFO is is the right individual, your HR directors, the right person. Those all help make for a strong Esop. Those are good points. Absolutely. And this kind of dovetails on point number three culture. You know big picture I mean culture is such a loaded word. It can be so much. Right. And it's beyond the scope of, you know, this, you know, 15 minute session we have here, right? Overall, you know, with the right people doing the right things, you want doers, you want an ownership mentality across your entire workforce, you know, versus a hired hand. As we all say, no one washes a rental car. Same thing happens with employees, you know? And lastly, longer tenure is better for key people, you know, so there's high turnover and so on. You know, overall esops thrive with stability, you know, and so on because you're keeping that company moving forward in the future. And what does that mean? A very stable base. And then anything else to add there in the culture. You know, culture, you know, it is a buzzword. Every company talks about it, every, talking head on TV is is talking about a company culture. And we get different pictures of it. But reality, it is, you know, like, the, the saying goes, is everybody rowing in the same direction? And I think that's important to have a shared goal that everybody is working towards. And it may be difficult to establish that at first, but once you do, everything seems easier, the burden to get work done, you know, it feels lighter. And that longer tenure for key people, that's important for a number of reasons. One, that's culture. You know, they can say, oh, well, Bill's been here for 30 years. You know, the company does take care of you. And so they, you know, the rank and file sees if I stick with the company, I got a good thing going. And perhaps that message, you know, trickles down to the rank and file. Additionally, when we do talk Esop transaction, you know, sometimes they may ask for employment agreements for these key people to know that after that transaction occurs, you know, are we going to maintain this trajectory and how how likely are these people to stay or are they looking at retirement, things like that. So it's very important to have those in place. And then, you know, all that culture being said, you know, is an Esop the right fit for the company from a culture perspective. But then we have to think about number four. And is this Esop a right fit in the industry, and where are we seeing it take shape now? And our biggest, pocket I would say are those AEC companies, the architecture, engineering, construction, those professional services and manufacturing kind of follow along that. But AEC leads the pack. There are other industries where perhaps it's hard to implement an Esop or professional designations or whatever, allow that sort of thing. And realistically, I think that we're seeing more and more companies is, adopt Esops because it's more a capital table decision rather than an industry decision. It's all about who owns the company now and if they want to exit, how do they exit exactly? Yeah. And with that, you know, to your point, it's more of a cap table decision right, than just industry okay. Yeah. This industry doesn't work. You know the big picture. You know you think okay a lot of new companies get formed in their future is very intentional right. You know if you're VC backed right, you're you know, probably focused on a big acquisition, right? Maybe IPO. Right. Not necessarily Esop if you're not, you know, if you're bootstrapped, you know, and so on. Or a, a family generational company, which we see a lot of Esops can make a lot of sense. Right. So usually you think, okay, who typically owns this this company in this industry, if it's individuals, then Esop can make a lot of sense. If it's institutional investors, you know, think public. You know, companies, you know, think you know, private equity backed and so on. Right. Then it's then it's a baby, right? You know, and so on. And also we're seeing a lot of Gen Xers out there these days go Esop, a lot of our clients in the past year fit that exact profile. And I attribute this to them being intentional, strategic and thinking long term in the future. Where do I want to be? Where do I want my company to be versus doing something last minute? So that's interesting. And I'll tell a quick story here. Recently we close, minorities. I've transaction, for a large commercial general contractor here in California. And very much it fit that profile. They had the culture going in, so they had employee ownership to begin with. Not an Esop, but broad based employee ownership, and had that very strong culture in place. We'll make the announcement, I think two months, you know, publicly. So I'm not going to show the company's name. Company is always on the best place to work list, you know, and so on. They started in Silicon Valley in the early 70s, you know, now the second generation is running it and it's like, okay, how do we get some liquidity out? The answer was Esop. And it's just such a natural fit there. And lastly, companies with high retention, strong moat meaning, you know, what is your secret sauce, right. What is your IP and ownership? Succession issues tend to be the best candidates. Those are good points. And I did want to mention, Gen X, so I'm glad you brought it up. And I have been kind of kicking this idea around in my head or this thought. I can't tell if it's. I saw dad work at the company until he was 80. I don't want to do that. I want to get out at some point, or I see a lot of MBA programs as well. Say, you know, when you get into a business day, one should you should also be planning for how you get out of that business. And a lot of that is sort of, that those MBA schools of thought about serial entrepreneurship, things like that, depending on what track you take. And I'm thinking, you know, are either of those true? First of all. And then second is one win out over the other. But, I Gen X is very much looking for and I wouldn't even call it an early exit, but that sort of freedom to do a number of things. So you're not married to the job until, you know, you're 80 years old, 75, 80 years old, wondering how the heck did I get here, exactly? And also a lot of entrepreneurs as well, you know, want to feel like they're in a partnership, right? Because, you know, if you're the sole owner, you know, over time you do start to notice, hey, people might not care as much, right? You know, I'm the only one who cares. I'm on the weekends. I'm, you know, stressed out about the budget collections, you know, our strategy and so on. And guess what? If you have partners who have equity in you, right? And their outcome is based on the business, you know, things are going to change, right? So I think a lot of people realize that, you know, and that's why startups always get the equity right in the beginning is because, yeah, we can't pay your top dollar. But guess what? You're going to have an outcome where you could. Right? It's it's always a risk going that path. So that's a big part of it too. And you know, of course, what's more American than owning a piece of your company. Right? So there's that too, you know? So overall culture comes, comes down to a lot of this. Okay. Let's move on to number five. Am I ready? You know, this is very much, kind of a loaded question here. It's a very personal question. You have to think big picture. What is your legacy? Is it tied to your business? Some people, it's not right, you know, it's, you know, hey, we built up this business. Let's sell it to the competitor and move on and do the next thing you know, so on. Right. And I see serial entrepreneurs do that. And then you also see serial entrepreneurs sell to these up and move to the next one. You know, we we've seen a lot of that. What are your long term goals for yourself and your business? Esop is very flexible. You can come in and buy one share. It can buy 100% of the company. And when you envision the future, what does it look like? You know, and that's both you as the business owner and the business itself. And then what are your thoughts there? You know, let's talk a bit about the team too, right? Because it's really the team that really drives performance. Here you go with Esop right. And you want that strong team in place to you know continue driving performance and be properly rewarded incentivized. Oh absolutely. And that's exactly what I was going to say. You know that team because there's question am I ready. It's sort of framed from the mentality of the selling shareholder. And, you know, you have all those questions about, legacy, as you mentioned, and things like that. But for the team, the executive team, are they ready? You know, could they zero transaction happens day one. Now we're an Esop. What? You know, what type of, additional work might that be? Additional reporting. You know, can they handle it? Are they ready? Do they understand that this broad based benefit is being put in place? And then also those rank and file employees and we do a lot for, the employee rollout portion of this, in order to educate and inform them of what is happening, you know, you're not becoming a millionaire overnight, but there's a potential to have a real material benefit, a real material retirement benefit. By being involved with this Esop. I, you know, your blood, sweat and tears and labor is it could turn into this, you know, sizable account. And we've seen it happen time and time again. And one thing that you know, in you're talking about this, am I ready made me think about we have a client that, was exploring a number of options PE, private equity, M&A, merging with somebody. And then they thought heard about Esop. And so they filled out our questionnaire and they expected our response to be oh no, you're too small. On Esop would never work. And turns out, you know, here we are selling, a majority stake in the company to the employees. Everybody's happy. And I just think you don't know what you don't know, so you may be ready to not even realize it, but to be able to ask those questions means you're probably pretty close to being ready. Exactly. Been in that transaction, you know, that client to work through that transition and so on. So fun. That was a a fun one. And they're still our client you know. So we do the ongoing administration compliance and so on. So we're very much tied in. And I expect great things for that company in the future. Right. You know lastly you know I would say you need to ask yourself, hey, is your business better off solo meaning independent right. You know, yeah. That brand name you have great vendor relationships, client customer relationships, good product, good service, etc. if so, Esop is probably the best bet. If the answer is no to that, then maybe not, right? You know there's there's other options out there. So they're private equity. You know you can hire a business broker, investment banker, etc. you know, shop you and hope that works out. And lastly, if you're the planning type two, you know, there's a lot of planners out there, right? You know, Esop is such an ultimate planning tool because you can really time it, you know, versus the other ones. Take your company to market. That's all about market timing, you know, and so on. So you can plan to shop at next year and not get any buyers. You know, now or 2 to 3 years now on down that, you know you don't have any outcome. So you know, you think, hey what's the alternative doing. Nothing. Right. So lastly, if any of these questions here are, yes, you know, an Esop might be a win win for you worth exploring. No. That's absolutely right I love those final points that you made. That's great. You know the being a planner and is your business better off solo or can it continue without you. Those are very important. You're right. And, I think, you know, these topics are probably the most important to look at from the lens of a business owner. And whether or not selling to their employees is a good option. Yeah. So thanks everyone for joining today. We hope you learned something new. Ask yourself these five questions. Want to continue the discussion we're around? Love to continue the discussion here. Thanks again. Connect with us on LinkedIn. You can look up Esop radio. You can look up mentor. You can look up both of us. Treva Gilmore and Benjamin Speight were both on there were active you know and so on. Check out our website nike.com. We have real life case studies and Esop news on our site. And then also lastly, reach out if you want to talk about our Esop fit analysis. And that's the first step that we do in assessing if an Esop is right for you. Have an awesome day! Join us for episode three why Owners choose Esops and why they don't take care of everyone. We like.