A $750K Lie & The ESOP Solution

?? You'll learn: How a "retention bonus" could have been an ESOP, benefiting seller, buyer, and employees

?? Read time: 3 minutes

?? Real deal analyzed: A $3M acquisition with a $750K compensation surprise

THE REAL DEAL

"I want to set aside $750K for retention bonuses," the seller explained. Simple enough…until I chatted with the team members after I acquired. The truth was much worse.

The retention bonuses weren’t about retention at all. During COVID, the team had worked to hold the business together. They'd even tried to buy the company themselves. This wasn't a forward-looking bonus — it was deferred compensation in disguise.

Let’s say that this wasn’t money that was owed to the team. Instead, let’s assume the seller wanted to invest in and pass the baton to his team instead.

DEAL DETECTIVE

Two paths could have created better value.

Scenario 1: Seller's Missed Opportunity

In the first scenario, instead of structuring deferred COVID compensation as retention bonuses, the seller could have used that same $750K to initiate an ESOP. This down payment, combined with an ESOP trust borrowing the remaining $2.25M, would have given the owner their full exit while transforming the team's COVID sacrifices into actual ownership. The owner would have received significant tax advantages, while the company could deduct its ESOP contributions. Most importantly, it would have healed the cultural wounds from the COVID period by giving employees what they'd actually asked for — a stake in the business they'd helped preserve.

Scenario 2: Buyer's Solution

In the second scenario — the reality where I discovered the truth post-purchase — a buyer could create a growing ESOP to address both past contributions and future alignment. Starting with a modest 2% allocation acknowledges the team's history while preserving acquisition value. Then, by establishing clear performance metrics tied to increasing ownership stakes, you create a path to 15-20% employee ownership over time. This approach uses future profits rather than upfront capital, making it financially feasible while still delivering meaningful equity to the team.

VALUE VAULT

For sellers: Transform past debts into future value. Instead of patching old wounds with bonuses, create lasting alignment through ownership. An ESOP structure would have provided tax advantages on the full exit price while preserving his legacy through employee ownership.

For buyers: Due diligence isn't just about verifying numbers — it's about understanding the human story behind compensation structures and team dynamics. An ESOP can heal past wounds while creating future alignment.

Stay rebellious,

kinza

P.S. Sound like a dumpster fire? It sure was. Learn how to avoid one, both as a buyer or a seller. Get the full story in my upcoming book Leverage. yes, my mom is one of the reviewers. Pre-order and get 300+ slides across 25+ modules and 8 tools showing you if you should acquire, how to do it, and how to grow...for FREE.