Whether an ESOP can or should participate in earn outs or escrows from transactions depends upon the structure of the transaction and what’s prudent. Watch our video to learn more.
Earn Outs & Escrows
Many transactions include escrow provisions that hold back certain sums of money to protect the buyer from due diligence issues. Very typically ESOPs are faced with that as a necessity. On the other hand, ESOP trustees will often push to be excluded from such escrow hold backs in exchange for cash subject to a fairness opinion from the ESOP appraiser.
There are also certain transactions that make it virtually impossible for the ESOP to participate on that basis or participate in an earn out. This occurs when a company buys the ESOP, buys its stock, and winds up being the parent corporation that sponsors the ESOP. In this type of situation, the buyer may actually wind up being in a potential prohibited transaction relationship with the ESOP if it tries to engage in some sort of earn out post-transaction.