ESOP
A Powerful Tool Yields Powerful Benefits.
Without question, CTC believes the ESOP is a winning exit strategy for many business situations. In fact, we can say categorically that any retiring owner, or one who wants to liquidate some equity, and who wants to complete a timely exit transaction, should at the very least consider the ESOP option. Clearly, you can sell your company in weeks and realize 74-100% of sale proceeds after tax. Your management team and succession family members (combined with the ESOP Trust) may be an ideal buyer and you may permanently defer capital gains taxes by selling to an ESOP.
But you have other options.
Let’s say you’re an owner looking to expand through merger or acquisition. You have a solid friend in the ESOP. We can show you how to finance any of the following scenarios through debt, keeping in mind the ESOP may substantially reduce the overall price and cost of financing of any transaction by as much as 52%.
Perhaps you want to generate capital for new plant and equipment. Used as a sophisticated tool of corporate finance, properly structured, the ESOP would be less expensive than conventional debt financing and taxes would be lower, resulting in higher cash flows in excess of cash needed to repay debt.
If you want to raise capital by selling a product line, subsidiary or operation, you might consider that your management team and ESOP Trust may represent ideal buyers. After all, they already know the business. An ESOP buyout would result in lower taxes and much higher cash flow.
What if regulations, expense and ongoing complications of being a publicly held company are holding you back? Management might consider an ESOP buyout and privatize the company. This strategy would create the highest yield for the selling shareholders and cut financing costs for the company. Further, the cost to implement ESOP transactions is tax deductible, unlike business brokerage cost that is taken out of seller proceeds.
The ESOP can also discourage a business takeover. It would place a large block of shares with the ESOP Trustee and the Board who would be inclined to favor the objectives of management rather than a hostile party. Note there is no pass-through voting to the employees except in rare situations. Takeover is more difficult when management leverages company assets in this way. And the current Board or one with additional NYSE defined independent board members control the corporate governance.
These are examples of our most basic strategies. For more background on ESOP, please see Why ESOP.
A Word of Caution
Easily 90% of all financial consultants will never suggest that you evaluate an ESOP because they simply wouldn’t know what to do to implement such a plan or they don’t understand how it would benefit you. Understandably, these consultants tend to follow financing concepts and solutions that are familiar to them. As a consequence, most owners of private businesses remain confused about the benefits of a leveraged ESOP. Some are severely misinformed and therefore skeptical.
As it happens, because business buyers are scarce, because bank and VC money is limited and IPOs are almost non-existent, a number of financial consultants just now are jumping on the ESOP bandwagon and entering the market. Most of them are experienced financial consultants looking into ESOPs for the very first time. These “newbies” are joined by another group — displaced corporate employees — who may understand ESOP interpretation and implementation — but who lack the deal structuring sophistication needed for designing and executing an effective exit strategy.