A Dynamic Exit Strategy
An employee stock ownership plan (ESOP) is a tax-exempt, defined-contribution retirement plan invested in employer securities. Represented by a trust and regulated by the Internal Revenue Service and the Department of Labor, an ESOP acts as a passive, friendly, and flexible buyer, interested in acquiring equity at any interest – from one percent to 100 percent.
Broad, National Footprint of ESOP Companies
Today, there are over 6,000 ESOPs nationally, covering more than 10 million employees. ESOPs exist across industries but are most common in the professional scientific and technical services, manufacturing, and construction industries. As a federally tax-exempt entity, an ESOP-owned company can be taxed as an S Corporation and as such becomes tax-exempt, ratable to the percentage sold to the ESOP. ESOPs exist in all states, with California accounting for the majority.
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What is an ESOP?A Structure in Which All Parties Benefit
Sellers, the company, and employees all receive meaningful benefits from an ESOP structure. ESOPs can serve as a flexible and tax-efficient succession strategy for sellers, while also accomplishing social and governance objectives for the company. Given that an ESOP is a passive buyer, the company and its leadership can continue to operate the business uninterrupted pre- and post-transaction.
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A Structure in Which All Parties Benefit
Sellers, the company, and employees all receive meaningful benefits from an ESOP structure. ESOPs can serve as a flexible and tax-efficient succession strategy for sellers, while also accomplishing social and governance objectives for the company. Given that an ESOP is a passive buyer, the company and its leadership can continue to operate the business uninterrupted pre- and post-transaction.
To learn more, click below.
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An Arm’s Length Transaction
ESOPs acquire stock at fair market value. Further, they rely on an independent financial advisor to provide guidance on a potential range for what can be considered fair market value. A common misconception is that an ESOP structure simply involves documentation and legal counsel. However, as an arm’s length transaction, fair market value is established with multiple rounds of negotiation. Hiring an investment bank ensures that sellers have an advisor actively negotiating in their best interest to drive maximum value.
An Efficient Transaction Process
ESOP transactions allow for a controllable and predictable process that can typically close in a four- to six-month timeline. The transaction process can be nuanced and complex.
Recent Case Study
An Efficient Transaction Process
ESOP transactions allow for a controllable and predictable process that can typically close in a four- to six-month timeline. The transaction process can be nuanced and complex.
For this reason, sellers should ensure parties hired have the expertise needed to create a seamless process. To learn more, click below.
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The Ideal ESOP Candidate
An ESOP can represent a potential liquidity solution, which has proven to be the case for ownership groups across broad industries. However, companies and sellers interested in executing an ESOP transaction should have at least 20 employees and a strong history of profitability and cash flow, typically a minimum of $3 million in EBITDA. Further, given that ESOPs rely on a company’s cash flow to finance the transaction, sellers should be patient with return of capital as most ESOP transactions close with seller financing.
FOSTERING A CULTURE OF OWNERSHIP
Simply establishing an ESOP does not foster a culture of ownership. Companies that sell to an ESOP must actively work to encourage a culture where employees are empowered to think and act like owners. Only then will the true power of the ESOP be unlocked. One way that companies can empower employees is through the creation of an ESOP committee, which can advocate for the employees’ best interest.
FOSTERING A CULTURE OF OWNERSHIP
Simply establishing an ESOP does not foster a culture of ownership. Companies that sell to an ESOP must actively work to encourage a culture where employees are empowered to think and act like owners. Only then will the true power of the ESOP be unlocked. One way that companies can empower employees is through the creation of an ESOP committee, which can advocate for the employees’ best interest.
Key Consideration
ESOPs are complex in nature and sellers should have a thorough understanding of operational impacts prior to closing. If you are interested in exploring how an ESOP could benefit you, please contact Laca Wong-Hammond for a customized analysis.
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