I’m exploring a unique structure for searchers: using an ESOP (Employee Stock Ownership Plan) to acquire businesses. For those not familiar with ESOPs, they offer a powerful incentive for employees by transitioning ownership to a trust who they are the beneficiaries of. ESOP-owned companies are 100% corporate income tax-exempt—a huge advantage that increases cash flow for growth and stability. In the structure I'm envisioning, the searcher would become President of their target company, which would be owned 100% by the ESOP.

So, if equity goes to the employees, what's in it for the searcher?

1. 20% Stock Appreciation Rights (SARs): This setup would allow you to retain a 20% stake in the company’s future appreciation without needing to fund an equity position upfront. SARs give you the opportunity to benefit from the company’s growth over time, with a payout tied to the increase in company value, which aligns your incentives with the company’s performance. My research indicates that 20% is a permissible level under Department of Labor regulations.

2. Enhanced Appeal to Sellers: Business owners often respond well to ESOPs because of the opportunity to reward and protect their employees. This can make your offer especially appealing, potentially smoothing negotiations and accelerating the sale.

3. Greater employee incentive alignment: ESOPs financially incentivize every employee at the company to drive up its value, thus aligning your incentives (via SARs) with theirs. Studies show that this incentive greatly drives up worker retention and productivity.

4. Greater access to leverage: Because ESOPs are tax-exempt, many lenders (including several I am working on this with) will consider this in their lending decisions, thus enabling you to be more competitive with cash-at-close, without the hassle of either raising or investing your own equity.

Assuming salaries were equal for this structure vs. more traditional, is this something anyone here could see themselves being interested in? There are huge societal benefits (employee-owners have 92% higher median household wealth, for starters), but I really just want to know if this seems like a good deal to searchers.