ESOP Boot Camp, Part 8: Who Works for Whom in an ESOP Transaction?

Who works for you — and who works for the ESOP — during a transaction?

In Part 8 of the ESOP Boot Camp series, Trevor Gilmore and Ben Spadt break down the key players involved in an ESOP transaction and clarify who represents whom throughout the process.

This episode explains the role of the ESOP sell-side advisor (or “quarterback”), the trustee, trustee counsel, and the independent appraiser. The discussion also covers what happens after closing — including the recordkeeper, board oversight, and annual valuation requirements.

In addition, Trevor and Ben outline common red flags owners should watch for when selecting advisors, including fee transparency, conflicts of interest, reinvestment structures, and overly complex or confusing explanations.

Topics covered include:

• The ESOP sell-side advisor (“quarterback”) and their role
• The trustee’s fiduciary responsibility to plan participants
• Trustee counsel and independent valuation firms
• Post-transaction roles: recordkeepers and governance
• Board oversight in minority and control ESOP transactions
• Fee transparency and common compensation structures
• Red flags and conflicts of interest to avoid

This episode is designed for owners, CEOs, and CFOs who want clarity around the structure, governance, and advisory landscape of an ESOP transaction before entering negotiations.

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

0:03

Hi everyone. Welcome to the official ESOP Radio podcast. This is episode eight of the Esop Boot Camp. Today we're talking about who's involved and who works for whom in an Esop transaction. We're going to do a deep dive. Okay, Ben, let's take it away. Absolutely, Trevor. So first and foremost, who works for you? The seller. Good question. Ben's the Esop advisor. Also known as the Esop quarterback is the main person who represents the seller in these transactions. That's what we do here at Nancy. We are Esop sell side advisors. ESOP Quarterbacks. You'll see some industry lingo out there on the sell side. Advisor. No I'm a buy side advisor. Sell side advisor is code word for selling something. Quick analogy here. If you're selling a house your IRA agent to sell your house, they're your quote unquote sell side advisor. Same thing here with selling all or part of your business through the Esop. You need to first start with a qualified Esop. Quarterback is our quarterback is going to line up bank financing. If that is part of your deal, that's crucial to find the best player that will be friendly to the company and be the right lender now and long term into the future. Next up is if you're going down the reinvestment path. We talked about the 1042 structure, the financial advisor who helps you down that path. They are working for you. That's awesome Trevor. Now this has the yeah, this has to be an arm's length transaction. So on the other side, who works for the Esop? Esop has three distinct players who represent them. Number one is the Esop trustee. They are the fiduciary. So for all of you out there, if you've heard that term before, the fiduciary means that they have to act in the participant's best interests ahead of their own, ahead of the interests of the company, and so on. So the trustee is representing the Esop, and they're acting as the buyer. They will have their own attorney. You'll see code speak out there. Esop attorney. Your RSA counsel and so on. Some trustees have their own in-house attorneys. Some do not. If they do not, they will be engaging outside counsel. And then also they will have an appraiser on their team, also referred to as a quote unquote financial advisor. The appraiser, his job is to value your company, which at this point of the deal he already know what your valuation ranges and so on. But guess what? The trustee doesn't. So they have to hire an appraiser to go through due diligence, ask you a lot of questions. Your your quarterback is going to be running a lot of that process to come up with that valuation. So they understand what the negotiation range is. So those three parties represent the Esop throughout the transaction and what you come to final terms agreeing on a price and then close ongoing. You'll see the trustee and the appraiser as well. Ongoing annual. So once you sell to an Esop, that stock has to be valued each year. And the appraiser is going to come in and and do that year and year out process. Let's dig a little deeper into that piece of, you know, the deal is done. And you said that the appraiser works for the company afterwards or, you know, it helps value the, the company going forward. Who else works for the company? Post transaction? Yes, a post transaction. You're going to have an Esop record keeper, also called the Tppa third party administrator. They are going to be handling the annual record keeping, giving your participant statements and so on, doing the IRS filings 50, 500 and so on. So they're working for the company now, Esop advisors and quarterbacks. Like I said, we handle that piece as well. We have a large Esop recordkeeping practice. So for our clients, we actually have that ongoing relationship where they're for the deal. Once the deal closes, where they're ongoing and we cover it inside advisory for the board and so on, other players have much different models or just focus on doing deals. So once they finish the deal, they're gone. Also, the board has overall oversight of the executive team. So just like it was pre transaction. The board post transaction has oversight of the executive team. So I want to highlight that too. So the board in essence works for the company pre and post transaction. Speak a little bit more on the board Trevor. You know the trustee helps the buyer. The Esop in this place by the company or the shares of the company. Could they negotiate for anything as far as board members things like that. Yes. So the trustee, when you go through a transaction definition, if you're selling a minority stake, meaning less than 50% or controlling stake more than 50%, you might see some governance negotiations and they're definitely in the control. You're going to see the introduction of independent board members professionalizing the board if it needs to be. It all depends on where you start. If the boards very informal, there's some work to be done there. If you already have a professional board, which many of our clients do with an opinion members and so on, maybe you'll see additional committees you know, a compensation nomination and so on being added. But, it's very much a facts and circumstances process to determine where the board is at today. And where it needs to be. And that's part of the negotiation with the trustee. Absolutely. So then let's talk about fees. I want to hire as a seller. I want to hire a quarterback a Up advisor. How are these deals quoted. But when it comes to to getting paid. Yeah. So it varies across the industry. Players like us start off with phase one. We call it Esop Fit analysis. That's the first step. That's a go no go analysis, which is a very clear, simple and straightforward fee there. Figure out the value range. Figure out the self structure that meets our clients, meaning you, your goals and objectives, and also what it means for the company and the company's employees. As a starting off phase one, that's a very clear place to start. But above and beyond that, say you've already figured out, yes, I want to go down the transaction. Then any Esau quarterback out there is top advisor, sell side advisor, whatever you want to call them. They should absolutely be able to provide clear, transparent fees and a clear timeline to go from here to close. Same goes for everyone on the team, the trustee, the lawyer representing the trust and the appraiser. If they cannot, it's a major red flag. You should run away. That's a good point. If they don't outline their fees up front and they're in a clear way. Yeah, I would, I would head the other way, that's for sure. So in addition to that, that major red flag, what are some other conflicts of interest perhaps to watch for? I always ask everyone on the team, do you have any conflicts to disclose? Sometimes you'll be surprised of what you hear. Number two exorbitant fees. So if it's a relatively straightforward transaction and they're quoting M&A level percentages to execute an Esau transaction, which by definition Esop as a fair market value buyer. So if you're starting off negotiating in that value range, the likelihood of close is high so that any risk is not there. So you should be paying a level fees. Make sure you know that going in. Also shop talk to 2 or 3 different advisors and make sure you're comparing apples to apples. Another major red flag out there is sell side advisors or quarterbacks participating in the upside of your Reinvestments should not happen. You should not fall victim to that run away. And what I mean by this is, hey, we'll sell your company to the Esop for 50 million. You're going to reinvest the proceeds into this vehicle. Did either we traded or we have upside in. And then when you sell that reinvestment vehicle, we get a cut of that. Don't fall victim to that. Another red flag is advisors who speak too fast in IRS or Department of Labor Code. Speak and offense meant to confuse you. Any advisor out there should be able to quickly explain what they're talking about and not confuse you. If you find yourself confused after the end of a call and not understanding what is being spoken about, make sure that you absolutely get clarification before you move on to the next step. Also, be wary of investment vehicles that require you to sign extensive NDAs just to get a look into what it is. Sometimes they'll say, hey, this is proprietary investment opportunity. You need to sign this NDA for us to even talk about it. It's like, okay, with today's transparency in the investment world, that's a major red flag. You should be able to explain to me what it is, whether it's a public company, stock and bonds, private company, and not require some sort of NDA just to disclose to me what that is. And lastly, if it's too good to be true, whatever you're being told, it probably is. That's true. And that's true in a number of areas. That's a good point. So can a bad advisor derail an Esop transaction? Absolutely. Yeah, we've seen it. We've had to clean up a lot of deals out there that have gone sideways. The biggest red flag out there is placing their interests ahead of yours. That means selling your solution. That doesn't make sense. Selling you financing reinvestment options and so on. That just don't make sense. Shoving one solution down your throat. And that can often mean the highest profit one over charging. That's that's a big one. And then also bringing in people to the deal as a personal favor for those people who might not be the best people or value for the deal, making it seem more complex than it is. Again, I talked about that earlier, but that's a major red flag. Everyone who's been doing Esop transactions should be able to speak clearly. After doing this for years and years out, so our goal is not to confuse anyone. If that is our goal, okay. Why are we doing that? Right. And the answer as well might be to confuse you all. This adds up to death by a thousand cuts. We've all seen this before. That analogy so true in any sort of business transaction, business negotiation and so on. So again, these are all red flags. You need to be aware of going through an Esau transaction on top of that for any business transaction for that matter. And also lastly remember you're the star. You're the business owner selling to the South. So you're definitely the star in this process, not the advisors. That's it in a nutshell. How Esop transaction works with the various players. Talked about the pros, the cons, some red flags out there as well. I'm Trevor Gilmore, CEO of Menke and I'm Ben Spadt investment banking. Our goal is to give you the owner, CEO or CFO of a successful business. The lowdown on Esops in a quick, straightforward manner because your time is valuable. Since 1974, he has been a full service Esop advisor. We've done thousands of esops also as an Esop ourselves. We're Esop natives. Connect with us on LinkedIn. We have a page about Esops under Menke Check out Esop radio or check out our website nike.com, which has a wealth of information. Feel free to reach out to learn more about Esops, including our Esop fit analysis, which is a first step in assessing if the Esop is right for you. Have an awesome day and join us for our next episode! Nine Life After the Transaction. Take care everyone!