AFI Association of Food Industries

AFI Serving the U.S. Food Import Sector

ESOPs: Selling an F&B Company in a High-Interest Environment

Patrice Radogna, CPA

In the current high interest rate environment, the flow of merger and acquisition transactions is slowing as lenders tighten their underwriting standards across industries. Uncertainty about the health of the economy has further slowed traditional deal-making activity in the food and beverage sector, among others. As a result, intrepid advisors are exploring structures that better meet the needs of both shareholders (sellers) and acquirers. One increasingly popular option in this environment – with uniquely advantageous tax and remittance features – is the Employee Stock Ownership Plan transaction.

The following aspects of ESOP deals may make them a fitting option for owners of F&B companies seeking an advantageous strategy in the current high interest environment.

Flexibility: A company-sponsored ESOP is an alternative buyer (partial or full) that can purchase a selling shareholder’s business, with the transaction able to be co-financed by both a bank and the seller. An ESOP structured this way can enable the seller to collect interest income and allow the company, at its discretion, to accelerate repayment (before maturity) without a pre-payment penalty. Since seller-financed debt is viewed as “friendly debt,” ESOPs can also offer a company flexibility in its repayment terms in the event of economic stress.

Tax efficiency: Capital gains taxes are part and parcel of traditional M&A transactions, but can be (and often are) deferred in ESOP transactions when selling shareholders elect to make a 1042 rollover with a portion of the proceeds. In addition, among other post-transaction tax advantages, companies have the possibility of becoming a tax-free entity after an ESOP deal closes.

Management retention: In an ESOP sale, employees can be awarded stock appreciation rights in addition to retirement plan benefits. These can be powerful incentives to motivate key employees to stay with the company and contribute further to its growth. In the wake of the “Great Resignation,” ESOPs are a compelling option for those concerned with post-transaction turnover.

Lower turn-over: A post-COVID survey by the National Center for Employee Ownership (NCEO) demonstrates the efficacy of F&B industry ESOPs in supporting employee retention, benefits and improved performance as compared to non-ESOP companies. The survey reveals that F&B companies that executed ESOPs experienced turnover rates of less than half of their non-ESOP counterparts during 2020.

Notable ESOPs in the F&B Sector

• King Arthur Flour

• Harpoon Brewery

• WinnCo supermarkets

• WaWa convenience stores - one of largest ESOPs/privately held companies in the U.S. ($11 billion revenue)

• Cliff Bar – became an ESOP and then sold for several $ billion in 2022, creating significant wealth for the employees

ESOPs Under Current Market Conditions

There are fewer lending dollars available currently and traditional debt financing is less able to provide the liquidity companies need in today’s high interest rate environment. A Bloomberg article from late 2022 highlights the role of creativity in getting deals done. Specifically, the article identified an increase in equity financing, agreements that take the leverage out of leveraged buyouts and the potential for spinoff deals to bring value in a struggling market. Ingenuity could continue to prove instrumental in successful dealmaking through 2023.

For F&B companies — particularly those with low debt, strong balance sheets, consistent earnings and strong management teams — the costs associated with debt financing and concerns about bank-financed leveraged buyouts could make ESOPs, financed with seller notes, an appealing exit opportunity. As borrowing costs increase, sellers are recognizing the opportunity to take on the role of the bank for part or all of the transaction sale price.

The ESOP as an exit option continues to garner attention as a solution for business owners to sell their companies and receive liquidity in exchange for ownership interests.

ESOP Advantages

Promoted by Congress in 1974 as part of the Employment Retirement Income Security Act, ESOPs were designed to boost the economic power of employees by enabling the tax-advantaged sale of a business from shareholders to its workforce. In a high interest rate environment, ESOPs may have a few advantages when compared to traditional merger and acquisition deals, including:

(i) Lower borrowing costs;

(ii) Flexibility in deal structure (i.e., a combination of external loan and seller notes); and

(iii) Income tax benefits.

A trust, set up for the ESOP, purchases and holds the company’s stock for the benefit of the company’s employees. The selling shareholder thereby gains liquidity from a "ready market," i.e., the trust. Any funding required can be secured through bank financing, seller financing, company cash or a combination of these.

Significantly, the company that undertakes an ESOP is often able to retain the corporate culture and management talent that contributed to its success over the years. In this way, ESOPs can help preserve morale and leadership structures that may be lost in other types of transactions.

Seller Notes

A key mechanism in ESOP transactions is the common use of seller notes as a form of debt financing structured as an interest-bearing loan. Seller notes enable the selling shareholder to earn a strong level of interest income and receive warrants to increase overall return, while the company benefits from lower risk than would be inherent in a secured loan from a bank. The tradeoff is that the selling shareholder does assume some risk and needs patience in the timing of repayment.


• The use of payment-in-kind interest or warrants (equity participation rights), which can yield a higher return on investment as compared to the ROI generated by outside financing.

• Flexibility with respect to seller note payments as a form of company-friendly debt, including temporary deferral.

• The ability to accelerate payments without penalties.

Potential risks:

• Seller notes are usually unsecured. In the event of a default, collateral is unlikely to cover the debt.

• Seller notes carry the risk that they may not be repaid if the company’s financial performance suffers.

• Seller notes are subordinated to any senior debt.

• Seller notes do not provide liquidity as quickly as bank financing.

ESOPs have proven to be an attractive alternative exit strategy for owners of companies that meet certain criteria, especially when seeking an option that is tax efficient, rewards and incentivizes employees, and preserves the culture and legacy of the company. This can certainly hold true for shareholders of F&B companies on solid financial footing. As part of a thorough analysis of various exit strategies, careful consideration of the pros and cons of an ESOP transaction may reveal the optimal path for yourself and the team that will take your legacy forward.

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Patrice Radogna, ASA, CPA, ABAR is an Advisory Services partner at Marcum LLP and co-leader of the Firm’s national employee stock ownership plan (ESOP) practice. Contact her at

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Association of Food Industries: Serving the U.S. Food Import Trade Since 1906
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