How long have ESOPs been around?
The first ESOP was established in 1956 by Louis Kelso for Peninsula Newspapers. The concept was formalized in federal law by the Employee Retirement Income Security Act of 1974 (“ERISA”).

Are ESOPs used for any other businesses or just cannabis?
Yes, according to the National Center for Employee Ownership, as of the beginning of 2025, 6,358 ESOP companies exist, collectively employing approximately 10.8 million employees, representing almost 8 percent of the private sector workforce in the United States. Over 50 percent of private ESOP companies are in one of three industry categories: Manufacturing (21 percent), Professional/Sci/Tech Services (19 percent), and Construction (15 percent).

For what size cannabis company does an ESOP make sense?
While around $20 million in minimum gross revenues and a minimum of 15 to 20 employees across a cannabis company’s operations is probably ideal, in certain instances an ESOP for a cannabis company with minimum gross revenues of $5–$10 million can be feasible.

What is the average cost to set up an ESOP if you are a five-million-dollar revenue cannabis company?
Generally, the costs to set up an ESOP will be more or less the same regardless of the size of revenues. Legal fees are just one component (and generally less than 50 percent of the total costs). For the transaction, the company’s costs in addition to legal fees will also include valuation experts, accountants, and specific cannabis ESOP insurance, as well as costs and fees charged by the ESOP Trustee for negotiating the ESOP terms and the Trustee’s financial and legal advisers. Assuming there are no major complications (such as buying another company to bolt onto the ESOP, dealing with any lender, complex corporate reorganization, etc.), the cost to close the transaction could be around several hundred thousand dollars, all in. Larger cannabis companies may benefit from more complex transaction structuring, which can increase total transaction costs if desired by the cannabis company’s owners.

Can ESOPs be used as a succession planning tool?
Yes, under an ESOP, all the founders/owners sell their equity in the cannabis company to a tax-exempt ESOP trust (although each selling equity holder can continue working with the company as an employee for however long they would like). This is one of the major benefits of the ESOP in the cannabis industry, where there are few buyers with the necessary liquidity or licenses to purchase a company.

How do ESOPs compare to other employee benefit plans?
An ESOP serves as the purchaser of the cannabis company owners’ stock and also provides a retirement benefit for the company’s employees over time. The retirement benefit provided to employees is similar to a traditional retirement plan, like a 401(k), except that it costs the employees nothing (i.e., employees do not contribute salary into the ESOP) and the value of the benefit is tied to the cannabis company’s stock, which should grow over time. Upon retirement, the cash value of an employee’s ESOP account can be rolled over into an IRA tax-free, just like a 401(k) account.

What are the long-term benefits of an ESOP for a cannabis company?
Multiple benefits include not paying any federal or state income tax and completely avoiding 280E. In an industry with a lack of liquidity and low M&A activity, an ESOP provides a means for the company’s owners to be bought out, with payments coming from the company’s tax savings. ESOPs generally create more employee productivity and less turnover as all employees have a beneficial interest in the cannabis company.

How do ESOPs affect the valuation of a cannabis company?
ESOP-owned companies generally see increases in valuation after becoming ESOP-owned due to significant tax savings and increases in employee productivity and retention.

What is the typical timeline for doing an ESOP?
As the sale of the cannabis company to the ESOP trust generally requires the approval of cannabis regulators, a lot depends on obtaining those approvals. In most instances, the timeline from start to finish is between four and six months.

What is the trustee’s role and responsibilities in an ESOP?
The trustee’s role, initially, is to ensure that the ESOP trust purchases the stock from the cannabis company owners for no more than fair market value. After the ESOP has purchased the company’s stock, the trustee is responsible for overseeing the ESOP’s operations and ensuring it serves the best interests of the ESOP participants (i.e., the cannabis company’s employees).

Does the trustee run/control the company?
No. The cannabis company’s managers and board of directors are responsible for running the company. The trustee is responsible for ensuring that the ESOP operates in compliance with applicable laws, including ERISA, and in the best interest of the participants/employees. With limited exceptions, the trustee does not actively participate in running or controlling the company.

Can management still be involved if an ESOP is set up?
Yes, typically management or the officers stay involved for a period of time with the new ESOP entity.

How do employees in an ESOP trust compare to shareholders in a company?
Shareholders in a company are the direct owners of the company and, in many instances, have the ability to vote on certain matters. Employees in an ESOP are awarded a beneficial interest in the company, which might vest over time, providing some payout to employees upon their retirement or termination of employment. Employees in an ESOP trust are not direct owners of the company and do not have the same rights as direct owners of a company.

What is this about ESOPs being easier in Maryland all of a sudden?
In Maryland, there was generally a five-year restriction on selling, transferring, or assigning control over licenses unless such sale, transfer, or assignment was approved in the context of a receivership. Recently, Governor Wes Moore signed SB215, which allows another exception to the five-year restriction.