Unlock the Power of ESOPs in Succession Planning with Kelly Finnell

In this episode of the DealQuest Podcast, Kelly Finnell, president of Executive Financial Services and a leading expert on Employee Stock Ownership Plans (ESOPs), delves into the transformative potential of ESOPs in business succession planning. With decades of experience and a passion for helping business owners leave a lasting legacy, Kelly has become a sought-after speaker, presenting at over 300 conferences across the U.S., London, and Sydney.

As the author of The ESOP Coach: Using ESOPs in Ownership Succession Planning, Kelly combines his legal expertise and financial acumen to guide business owners in monetizing their companies while securing the futures of their employees. His journey from aspiring priest to ESOP expert is as inspiring as it is unique. Tune in to hear Kelly’s insights, including the story of his first ESOP deal and his tips for business owners considering this approach to succession planning.

LEGISLATION CAN BE GAME-CHANGER FOR BUSINESS STRATEGIES

In 1984, a key change in tax law revolutionized ESOPs (Employee Stock Ownership Plans). Section 1042 of the Internal Revenue Code allowed owners of closely held businesses to defer capital gains taxes when selling their stock to an ESOP. Before this, ESOPs were mostly used by large banks and public companies. This shift opened the door for smaller businesses to explore ESOPs as a smart succession planning tool.

Kelly shares a great example of how this law made a difference: a small business owner used an ESOP to secure his employees' future while preparing for retirement in Florida. It’s a perfect illustration of how understanding and leveraging tax laws can help business owners create smooth transitions, meet their goals, and provide meaningful benefits for their teams.

The takeaway? Keeping up with tax law changes can unlock creative opportunities to grow, innovate, and plan for the future.

IS AN ESOP RIGHT FOR YOUR BUSINESS?
Not every business is a perfect fit for an Employee Stock Ownership Plan (ESOP), but understanding the key factors can help you decide. Kelly Finnell explains that companies with an adjusted EBITDA of at least $2 million—though most are closer to $4 million—and around 100 employees are typically the best candidates.

Culture also plays a huge role. ESOPs work particularly well for service-driven businesses like engineering, architecture, or PR firms, where maintaining a strong company culture is essential. Unlike selling to a third party, which can shake up the workplace dynamic, ESOPs let businesses keep their identity intact while giving employees a stake in the company’s future.

If preserving your company’s culture and protecting your team are top priorities, an ESOP might be the solution you’ve been looking for.

A STRONG MANAGEMENT TEAM IS CRUCIAL FOR ESOPS AND INTERNAL TRANSITIONS
If you’re considering an internal transition, like an ESOP, a capable successor management team is a must. Without one, the business could struggle once the owner steps back. Kelly Finnell shared an example of a company where the owner had already handed off responsibilities to a trusted team—making it a great candidate for an ESOP. The team was ready to keep the business thriving.

On the flip side, companies without this foundation may fare better with an external sale, where the buyer’s established leadership can take over operations smoothly.

Finnell also highlighted the importance of strategic planning during transitions. He shared a story of businesses that implemented ESOPs in early 2008, just before the Great Recession. Thanks to flexible seller financing in their plans, they renegotiated terms and weathered the storm. It’s a reminder that preparation and strong leadership are key to making internal transitions successful.

MANAGE AN ESOP: WHAT CHANGES AND WHAT STAYS THE SAME

One big takeaway about managing an ESOP? It doesn’t drastically alter how the company runs. Kelly Finnell explained that managing an ESOP is a lot like managing a business with a 401(k) plan. After the ESOP purchases shares, they’re held in a “suspense account” and gradually distributed to eligible employees based on their salaries.

While an ESOP trustee helps oversee the transition, the company’s board and officers still handle day-to-day operations. This setup allows employees to step into ownership without disrupting the business’s stability or familiar structure. It’s a smooth way to transition while keeping things running seamlessly.

ONGOING EDUCATION IS KEY FOR EMPLOYEES TO UNDERSTAND ESOPs

When a company introduces an ESOP, employees often don’t immediately grasp its value. The idea of ownership can be abstract, especially for those still in an employee mindset. For example, an electrical contracting company in College Station, Texas, launched an ESOP for 300 employees. They explained the basics, showed growth projections, and used examples to make things clearer, but employees didn’t get excited right away.

This highlights that it takes time for employees to truly understand and appreciate the ESOP. To bridge that gap, the company committed to ongoing education with annual meetings and quarterly newsletters. These focused on small, digestible pieces of information, helping employees gradually understand the benefits. Over time, as they saw coworkers retire with big payouts, they began to see the long-term value of their ownership.

The takeaway? Consistent, repeated education is crucial for employees to shift from an "employee" to an "owner" mindset.

UNDERSTAND ESOP PAYOUT STRUCTURES AND TRIGGER EVENTS
It’s important to understand how and when ESOP benefits are distributed, especially since certain events trigger payouts. These events include death, disability, retirement, and termination of employment. Unlike a 401(k), where employees can usually access their balance within a few months, ESOP payouts follow a more structured timeline.

For example, when an employee retires, they don’t get a lump sum immediately. Instead, they start receiving payouts in the year after retirement, with 20% of their account balance paid annually over five years. This helps protect the company’s cash flow, preventing financial strain from large payouts.

If an employee leaves for any reason other than retirement, they must wait five years to receive any payout. This safeguard ensures that the company remains financially stable while still providing retirement benefits to employees. Essentially, the payment structure helps balance long-term employee benefits with the company’s need to maintain its financial health.

ESOPs: A GROWING SUCCESSION STRATEGY

ESOPs (Employee Stock Ownership Plans) are becoming an increasingly popular option for business owners, and it’s no surprise why. Two key factors are driving this shift: the aging baby boomer generation and a growing understanding of ESOPs among professional advisors. As many baby boomers approach retirement, they’re looking for ways to transition out of their businesses. While selling to a third party has been the go-to option, more are now turning to ESOPs as a way to sell to their employees.

An ESOP lets business owners sell the company to their staff, which creates a win-win. Owners get liquidity (cash for their business) with significant tax advantages, while employees gain ownership, helping them build wealth over time.
According to Kelly Finnell, ESOP transactions have nearly doubled in recent years, thanks to both business owners and advisors gaining a better understanding of the benefits. This trend shows just how important it is for business owners to consider ESOPs as a strong option for their exit strategy.

UNDERSTAND THE COTS AND SUPPORT FOR AN ESOP TRANSACTION

Setting up an ESOP can be a great succession strategy, but it comes with significant costs and requires a strong team of professionals. This team typically includes an ESOP trustee to oversee the transaction, financial advisors for company valuations, and legal teams to handle compliance and negotiations. In some cases, a bank lender might also be involved.

According to Kelly Finnell, the cost of setting up an ESOP generally starts around $500,000, covering all the necessary professionals. While this may seem steep, it’s still more affordable than selling to a third-party buyer, which often involves additional fees for brokers, investment bankers, and other intermediaries.

While the initial investment may be high, the long-term benefits of employee retention, continued company success, and a smoother ownership transition often make the cost worthwhile. So, even though setting up an ESOP can be complex, it’s often a more cost-effective and beneficial option compared to a traditional sale.


KELLY FINNELL'S VIEWS ON FREEDOM

For Kelly, freedom means being able to do work he loves without the restrictions of a boss. He’s never had a boss and doesn’t see retirement in his future, as he’s passionate about helping business owners understand the value of their work. He also treasures the freedom to balance work and personal life—whether that’s playing golf, spending time with his grandkids, or enjoying life with his wife of 47 years. For Kelly, freedom is about doing meaningful work while also enjoying personal fulfillment.

Tune in to this episode to hear Kelly Finnell share his expertise on ESOPs, succession planning, and the benefits of selling a business to employees.
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FOR MORE ON KELLY FINNELL
Kelly Finnell's LinkedIn
ExecFin Website
Succession Planning Guide

FOR MORE ON COREY KUPFER
Corey Kupfer's LinkedIn
Corey Kupfer's Website

Corey Kupfer is an expert strategist, negotiator, and dealmaker. He has more than 35 years of professional deal-making and negotiating experience. Corey is a successful entrepreneur, attorney, consultant, author, and professional speaker. He is deeply passionate about deal-driven growth. He is also the creator and host of the DealQuest Podcast.

Get deal-ready with the DealQuest Podcast with Corey Kupfer, where like-minded entrepreneurs and business leaders converge, share insights and challenges, and success stories. Equip yourself with the tools, resources, and support necessary to navigate the complex yet rewarding world of dealmaking. Dive into the world of deal-driven growth today!