Much is said about the benefits of employee stock ownership plans, known as ESOPs: They’re a good option for helping business owners tap into the value of their companies without engaging in the public markets. They have been shown to boost employee morale and to improve profits. But less is said about the potential downsides–and the downright crippling affects an ESOP gone awry can have on a company’s bottom line. Perhaps no one knows this better than Chris North, the CEO of Shutterfly.

Shutterfly is itself not an ESOP. It’s a sturdy 20-year-old public company based in Redwood City, California. In 2018 the digital photos powerhouse acquired the sprawling school-photos provider Lifetouch Photography, which was at the time 100 percent owned by employees and was starting to crater, in part, under the weight of paying out its many retirees’ for their owned stock. So, Lifetouch’s trustees, who represent employee shareholders, had a difficult decision to make, and one that would almost certainly end its beloved ESOP. It put the company up for auction.

Shutterfly’s growth had long been fueled by acquisitions, and CEO North had already eyed up to 100 other companies when he heard Lifetouch was up for sale. He swooped in.

The pressure of slowing growth.

At the time of the acquisition, about half of all U.S. schoolchildren had their photographs taken by Lifetouch photographers–a massive network of some 12,000 shutterbugs–for class picture day. It had also become the largest American photographer of infants and toddlers with more than $950 million in revenue. Everything looked sunny for the Eden Prairie, Minnesota-based business–from the outside.

On the inside, a different picture had emerged. Not unlike Shutterfly, which had been one of the few success stories to survive the dot-com boom and bust, Lifetouch had fueled most of its company’s growth through acquisition. But despite the massive revenues for the fiscal year ending in June 2017, Lifetouch actually had an operating loss of $3.9 million–in part, because of a roughly $100 million ESOP contribution. It had become the state’s largest ESOP, and that meant paying out funds to former employees rather than pumping them back into growth. With 16,000 current and former employee owners, the payouts were sapping its ability to invest in the future.

The 82-year-old company, suffering also from waning consumer interest in print photography, had to act or face possible annihilation. “Growth had slowed. We had to make investments. That put pressure on us,” Michael Meek, Lifetouch’s chief executive, told the Star Tribune in 2018. “To accelerate growth we needed to consider a new structure.” That’s when Lifetouch’s board of trustees approved putting the company up for auction–knowing it would likely mean the dissolution of their ESOP. Shutterfly, the winning bidder for Lifetouch, declined to make Meek, now a Shutterfly employee, available for this article.

Read the rest of Christine Lagorio-Chafkin’s article at Inc.