ESOP (Employee Stock Ownership Plan)

Definition

A retirement trust that buys the company on the employees' behalf.

Why It Matters

It is a rival bidder a searcher meets without seeing, because an owner who wants the team to inherit the business will take less money to get it and needs no diligence on the buyer. It is also an exit route worth knowing when you sell: the tax treatment can be favorable to a seller, and the buyer is a trust rather than a person who has to be convinced. The trade is that setting one up is expensive and slow compared with selling to an individual.

In numbers: An ESOP buying a $6M company might use $2M of bank debt and a $4M seller note, so the employees own it outright while the seller is paid over years rather than at closing.