What Does Employee Stock Ownership Plan (ESOP) Mean?An employee stock ownership plan (ESOP) can be classified as a type of exit strategy for business owners. In an ESOP, the business owner is selling a portion of the company's equity to an employee or employee group. It allows the employees to participate in the share ownership without a significant and immediate capital outlay. It is similar to an MBO, but in an ESOP the existing owner is not necessary exiting the business.
ESOP's are very common in the US because there is specific tax legislation that provides significant tax advantages to the seller, which makes buyouts led by employees all the more appealing. The primary challenge with ESOP's in private companies is that they are costly requiring administration and legal oversight, and they require a certain level of financial disclosure that the private owner may be unwilling to provide.