ESOP Boot Camp, Part 7: How an ESOP Transaction Actually Works

How does an ESOP transaction actually work from start to finish?

In Part 7 of the ESOP Boot Camp series, Trevor Gilmore explains the step-by-step process of executing an ESOP transaction once valuation, structure, and financing have been determined.

This episode walks through the key players involved — including the ESOP trustee, trustee counsel, and independent appraiser — and explains how negotiations unfold between the seller and the ESOP trust. Trevor also outlines what due diligence looks like, how trustees are selected, and what actually happens at closing.

Using a practical transaction example, this episode clarifies how bank financing and seller notes come together to fund an ESOP purchase.

Topics covered include:

• The key parties representing the ESOP trust
• The trustee’s fiduciary responsibility
• How trustees are selected
• Due diligence and the data room process
• Negotiation dynamics between seller and trustee
• Term sheets and governance considerations
• What happens at closing
• A real-world example of ESOP transaction funding

This episode is designed for owners, CEOs, and CFOs who want a clear understanding of how an ESOP transaction moves from planning to closing.

Transcript

0:03

Hi everyone. Welcome to the official ESOP Radio podcast. We're at episode seven of the Esop Boot Camp. Today we're explaining how an Esop transaction actually works. Hope everyone's doing well. Let's go ahead and dive in. So we've gotten to the exciting place of actually making this whole Esop happen. We've figured out your value range, how much you want to sell to the Esop, figured out the financing piece and the overall structure of the deal. For building a house, we've created the blueprints, the design. Now we're ready to interview contractors and make this thing happen. So that's where we're at in this process. Today's episode, you'll learn how the whole process works. The question you might have is, okay, I've been working with my Esop advisor slash quarterback. So who are the other players? The other players are Esop trustee. Who is the food of the Esop, their counsel. Some trustees out there have their own in-house counsel. Some don't. And also their appraiser. So the big picture there's going to be three parties representing the Esop trust. And they are sitting across the table from us in negotiations. Their whole job is to ensure that the trustee pays no more than fair market value for the company stock that the esops acquiring. And to make sure that the Esop is operating under all the rules Department of Labor, IRS, RSA, Free Code and so on. So how is the trustee team hired? And that's our role as the quarterback. Here is how quarterback is going to line up appropriate Esop trustee members according to geography expertise size. Larger companies go for the institutional stake. Large banks, etc. that have their own trust departments smaller to lower midsize companies. Maybe they're looking at more sophisticated independent trustees and so on. There's a whole marketplace out there. Our job as the quarterback is to line up appropriate people who are the right fit and also culture fit, personality, expertise and so on to make sure that we're going to get to a good deal. Once you and your board have decided which trustee team you ought to go with, they get engaged and they start due diligence in the context of many. Since we've done already all the initial Esop fit analysis, we already have a data room set up. So guess what? That trustee team gets access to that data room. Likely the what additional information as well. So you your CFO often through these transaction processes the CFOs do a lot of heavy lifting will be uploading you know current financials legal documents, you know, and so on. If you have existing counsel, general counsel, they do play a role in this as well. Due diligence takes place that can last anywhere from, you know, 48 weeks to longer depending on, you know, timing and availability of data and and so on. Once the trustees team is ready to negotiate, then your Esop advisor kicks off negotiations, and that's when the whole thing starts. So on your side, you've sketched out working with your Esop quarterback. The value range is your quarterback is also raise financing. Now we need to negotiate the deal and make it real. Negotiations take place usually there's several terms of the term sheet. So you have to be patient there. It's much different than say you're negotiating a contract with a client or a new customer. Sometimes there's numerous turns back and forth, such as price roll terms, quantitative components, interest rates, qualitative. What does the governance look like once we get to an exit place that is acceptable to you as a seller and the trustee representing the trust, then we can move forward with close. And what happens in close? I give an example $50 million transaction. Let's assume that we negotiated that as the final price. And we raised 20 million of bank financing. The bank comes in and closes and funds 20 million. And what about that other 30 million while you're carrying that as a seller? Note in this example that closed bank funds 20 million to the company. How many funds? 29 to the Esop and then leaves office cutting you a check for 20. That gives you liquidity for reinvestment. If you're doing the tax deferral that we talked about earlier, or you have the cash to do whatever you want, and then 30 million is that seller. No piece there that we talked about in earlier episode. That is it in a nutshell. There's more to this. But I hope through this episode that you've learned how it works. We always tell people that it can be a bit of a different negotiation, because in essence, you and your board are hiring your counterparty. You're sitting across the table where negotiating back and forth. We're helping you trustee you on the other side with their team. But then once we get to price in terms everyone is on the same page, 13 on the same side as well. Have an awesome day. Thank you for joining us. Reach out to us on LinkedIn. I'm Trevor Gilmore, CEO of Menke. You can check out our LinkedIn page or website. We have information about ESOP-FIT analysis. That's our first step. Also a lot of client case studies and Esop news. Join us for episode eight. What happens after that? You saw transaction. Take care everyone.