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The Paycheck Protection Program (PPP), part of the CARES Act stimulus package appears to be starting this morning, with some banks accepting applications. Some ESOP experts feared that the PPP may have been drafted in a way that would effectively have delayed ESOP companies' participation, but some ESOP companies are reporting success. On April 13, we began reporting results from our survey of ESOP companies, which show, for example, that among companies that had filed a loan application, just under half (43%) had received confirmation that their loan was approved by the SBA. Approval typically took just over three days.

We have noticed that a good portion of successful sales to an ESOP are "rebounds" that happen after an owner went through a conventional sell-side engagement with an investment banker and decided they were not comfortable with the resulting offers and potential buyers. After the long and arduous sales process, they are often turned off by the terms of the sale, the culture of the prospective buyers and the potential impact on the company and its employees. Many owners eventually find that selling to their own management and employees via an ESOP (Employee Stock Ownership Plan) is the best fit for their personal goals and those of their companies. We think that every owner should consider the ESOP at the beginning of the process.

Under a special program sanctioned by federal law, the Small Business Administration (SBA) provided guaranties on certain senior bank loans used in leveraged ESOP stock purchases. The federal guaranties were designed to provide partial credit loss protection for banks that would otherwise shy away from such loans. On the face of it, this sounded like a lucrative government program for the ESOP world, however the SBA law's restrictions under this program were so onerous, obscure and, in many instances, counter-productive, that ESOP bank loans using the SBA guarantee were as scarce as hen's teeth. In fact, of all the leveraged ESOPs I've been involved in, only one transaction fell within the SBA ESOP loan program.

It seemed very logical that the run up in equities in late 2017 in anticipation of lower corporate tax rates would significantly raise the value of privately held firms and ESOPs. The basic math of valuation dictates that higher free cash flows equals higher values. A no-brainer. However, we're starting to see data and anecdotal evidence that maybe valuations have remained more stable than we thought.

One common knock from investment bankers about ESOPs is you can't get the best price using an ESOP. While it may be true that strategic buyers can pay more than financial buyers or PE firms, what matters most is not what you get but what you keep.

A 100% ESOP-owned S corporation naturally becomes more acquisitive as the years pass and it pivots from retiring its substantial ESOP buyout debt to accumulating cash. When evaluating acquisitions, board members need to be aware of certain valuation nuances that may negatively bias their view of an acquisition target.

There appears to be good news coming out of the 6th Circuit for company-funded employee ownership plans (ESOPs) and their fiduciaries. The case dates back to 2009 and spans several decisions and important events, including the Supreme Court’s recent decision in Dudenhoeffer v. Fifth Third Bank.

A recent DOL settlement agreement has the ESOP advisory community abuzz with talk about its impact on ESOP transactions. We believe it’s a good thing all the advisors are talking about the agreement as it is motivating everyone to re-assess their current advisory procedures and practices.