For companies with established ESOPs, the question is no longer whether the ESOP is good for the employees (we know that’s true!) — it’s how do we manage it over time to ensure it remains sustainable and is supportive of the company’s long-term objectives? Studying sustainability isn’t a one-off exercise. It’s a decision-making framework that should evolve alongside your business strategy, capital needs, and employee demographics.
Sustainability Study Process
A robust study follows a thoughtful process:
- Set Objectives: Define what sustainability means for your company. Is the priority managing repurchase obligations, broadening ownership, or pursuing a more aggressive growth plan?
- Baseline Analysis: Develop a comprehensive assessment of the effectiveness of the “status quo” by integrating financial forecasts, repurchase obligations, synthetic equity, external debt, and projected share value. Identify funding gaps and develop a platform for analyzing alternatives.
- Evaluate Alternatives: Model the impact of policy changes (distribution policy, diversification), alternate repurchase strategies (redeeming vs. recycling), transactions (releveraging), alternate growth strategies, or a corporate reorganization or recapitalization.
- Develop Recommendations: Translate findings into a near- to mid-term strategy agreed to at the board level, with flexibility to adapt.
Keep in mind that tactics are often interconnected. A change in strategy without proper analysis of the fulsome impacts can yield unexpected or undesirable outcomes.
How Often Should You Refresh?
Best practice is to update your sustainability study annually as part of the company’s broader budgeting process. However, depending on the dynamics of the company, a refresh every 2-3 years may be sufficient. In reality, timing is less about the calendar and more about triggers. At a minimum, you should consider revisiting the study when:
- Financial assumptions shift – performance, forecasts, capital structure
- Demographics change – aging workforce, new hiring patterns
- Philosophies evolve – ownership culture, leadership priorities
- Strategic events occur – acquisitions, large share buybacks, leveraged transactions
Annual board-level discussions should accompany the study. Even if you are not running the full analysis every year, the board should review repurchase obligations, cash flow implications, and equity allocations as part of regular governance.
Timing Matters
A common pitfall is treating sustainability as a static “check-the-box” exercise. It takes time and a thoughtful process to ensure a thorough analysis, especially when big decisions are on the line. While project timelines can vary significantly depending on the circumstances, companies engaging a professional for a sustainability study should generally allow 3 to 4 months from collection of data to project completion, including development of the baseline analysis through assessment of alternatives. Those considering a transaction (such as a releverage transaction) upon the culmination of the study should leave additional time following completion of the study—ideally, 8 to 10 weeks before year-end– to allow all parties, particularly the trustee, the appropriate time to evaluate the strategy.
Many company leaders want to know: How much of my time will I need to commit to this analysis? As with everything in ESOPs, the answer is: it depends! That said, an ESOP company’s CFO and HR leader typically are closest to these engagements, gathering and supplying the necessary diligence items and being available to answer questions. Often, the ESOP recordkeeping firm assists in providing ESOP-related data. Beyond the time it takes to gather the data, company management should be available to review and discuss the key assumptions that will be used, and then to review and discuss the outcomes of the analysis. Each of these components usually requires a few dedicated hours. For the most part, the professional providing the study should be doing the heavy lifting.
By embedding the study into a recurring cycle, companies ensure that ESOP policy and business performance remain in sync. The result: fewer surprises, stronger alignment across stakeholders, and a structure that supports—rather than constrains—growth.
The Bottom Line
Sustainability isn’t a single decision; it’s an ongoing process of measurement, testing, and refinement. The impact of the study depends as much on when and how often it is revisited as on the methodology itself. For companies serious about long-term ESOP success, integrating the sustainability study into regular board discussions is no longer optional—it’s essential. The ESOP repurchase obligation is often a multi-million-dollar cashflow item in a company’s annual budget, so doing the appropriate analysis to understand its impacts should be approached no differently than a significant investment in a piece of equipment or a building expansion.
Chartwell Consulting Services
Ownership, compensation, and financial strategy are inseparable for privately held companies. Our consulting team has deep expertise across this spectrum, allowing us to provide complete and meaningful insight to help guide decision making to drive long-term results.
Employing a holistic approach, we collaborate with stakeholders, including senior management, boards, and ESOP trustees, to support them in making strategic decisions designed to sustain their organizations.
