The Journal of Accountancy (March 2010) has a great article on ESOPs. The ESOP Exit Strategy explores the advantages of using an ESOP as a succession planning tool:

• S corporation tax attributes make ESOPs very attractive. More companies installing ESOPs are arriving at an employee-owned company often with 100% of the stock.
  
• S corporation and C corporation attributes (including the IRC § 1042 tax-free rollover) may be combined to forge a flexible succession plan meeting the goals of sellers, senior management and ESOP participants. (See Increasing Capital Gains Rates and Section 1042 Sales for more information)
  
• The potential for future tax increases magnifies the tax incentives enjoyed by ESOPs.
  
• An aging population increases the demand for succession alternatives, including ESOPs.
  
• Optimal financial results are obtained when the ESOP is combined with ongoing communications to educate employees about the responsibilities and obligations of ownership.
  
• ESOPs are practical for both business owners and CPA firms.
  

It defines some of the issues to consider before installing an ESOP. Here are some of the key takeaways:

• When a business owner is evaluating their business transition options, the seller could sell to a strategic buyer (if available), but would lose control over what happens after the sale:

  In mature markets or economic down cycles, strategic buyers may not be available or may be unwilling to pay what a long-term owner believes the business is worth. In addition, the synergies that make a purchase attractive to many strategic buyers generally involve consolidation, which frequently includes facility closings, discontinuation of product lines or services, layoffs, name changes and other transitional moves that operating owners find incompatible with their loyalty to other shareholders, employees, customers and communities where they operate.

• When selling to an ESOP, the selling shareholders control the transition process:
  
  One important aspect of a company's ESOP installation is that current shareholders control the transition process. They determine the full range of transaction attributes including whether the ESOP will be installed, when the transaction will take place, how much stock will be sold, and the financing details.
  
• Another benefit to selling to an ESOP is that the CPA will continue to maintain a relationship with the company. As a company's trusted advisor, the CPA will be positioned to continue advising the company for many years and may even be a strong candidate to serve as an ESOP trustee:
  

  While CPA firms are typically not independent of their clients for the purposes of providing ESOP valuations, CPAs individually are often strong candidates to serve as ESOP trustees where there are no real or perceived conflicts of interest. By the nature of their training and familiarity with accounting, finance, corporate governance and regulatory literacy, CPAs often possess the skills required of ESOP trustees... Serving as an adviser on such issues as corporate governance, strategic thinking and best internal control practices are other venues for CPAs to provide services to ESOP clients.

• ESOPs also allow the selllers to sell in stages:
  
  The selling shareholders may elect to sell any amount of their stock from a small block to 100%. This means that the transaction is scalable. Selling a smaller block of stock may mean the transaction is more easily financed from existing lines of credit, reducing the company's risk of default if events suddenly turn negative. If a piecemeal approach is adopted, the shareholders may structure the transaction so that control remains with the sellers until the controlling block of stock is sold to the ESOP. This popular strategy helps ensure the company's survival by avoiding excessive leverage.

The article also explores implementing an ESOP in a professional services firm, noting that state law will be a key factor in establishing a firm. We have previously explored some examples of ESOP-Owned CPA Firms.