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.
Read MoreWe 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.
Read MoreUnder 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.
Read MoreIt 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.
Read MoreOne 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.
Read MoreA 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.
Read MoreThere 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.
Read MoreA 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.
Read MoreTaxation is a key planning element when selling a business. And while crowing to your golfing pals about the great price you got feels good, keeping more of what you get feels even better. Whether you sell via an IPO, merger, or third-party transaction, read on if keeping more of what you make is of interest.
Read MoreA new study recently published by the National Center for Employee Ownership (NCEO) indicates that leveraged ESOP transactions exhibit a lower bank debt default rate than other types of leveraged bank loans. The NCEO’s survey of banks indicated that during the volatile 2009-2013 period, only 1.5% of ESOP bank financing resulted in a loss for the lender. The study compared these results to an S&P IQ Credit Pro report indicating that the default rates on a broad grouping of middle market commercial and industrial loans was 3.75% for the period 2010-2013.
Read MoreOnce an ESOP acquires company stock there is a requirement that the stock’s value be appraised by the independent appraiser at least annually. Many companies view this process as a perfunctory exercise whereby management supplies the appraiser with updated financial and other information and several weeks later the appraiser kicks out a stock value with little fanfare and almost no debate and review. A major portion of our advisory service involves assisting long-standing ESOP companies with various matters including debt refinancing, follow-on ESOP stock purchases and other ongoing ESOP advisory services. In these engagements, we almost always review the annual ESOP appraisals as part of our initial due diligence. In our review it is amazing how many times we encounter appraisals that have one or more errors. Less often, but even more remarkable, are the appraisals we encounter where there is a disconnect between the value analysis and the true prospects of the business (i.e. the appraisal is dramatically missing what we subjectively view is the appropriate value of the business).
Read MoreGAAP accounting for leveraged ESOPs can be misleading when looking at shareholders’ equity on a balance sheet for new ESOPs. This matters to bankers and sureties in particular since the negative impact on shareholders’ equity can be dramatic.
Read MorePilot Hill Advisors was retained by a consulting firm to assist in structuring and raising capital for a second ESOP transaction, where the ESOP was to purchase the remaining outstanding stock and become the 100% owner. The direct shareholder who owned the 60% equity block to be purchased was inactive and interested in selling his remaining stake to the ESOP. While there were a variety of structures to accomplish this objective, the primary challenge in completing the sale revolved around financing. The company had favorable cash flow but the service-nature of its business not surprisingly resulted in a balance sheet that lacked traditional bank collateral. Hence, the lack of collateral dissuaded banks from lending unless there was an external guaranty to support the loan.
Read MorePeople often think if an ESOP owns shares in a company, it has to be the only shareholder. This is not the case and more often than not, the ESOP is but one of several shareholders. An ESOP sale is most often used in combination with other ownership-transition strategies to maximize the tax efficiency and opportunities for the seller, the successor management team and the employees. Thus, it is as common for an ESOP’s ownership to change many times during its life as it is to stay the same.
Read MoreThere is a lot of chatter these days regarding the fiscal Armageddon and the plight of government contractors. Notwithstanding the dire predictions, there are many thriving contractors that have and will continue to provide valuable products and services to the federal government. The entrepreneurs behind these companies are probably not aware of a uniquely lucrative transaction that they could execute when they are ready to sell their business.
Read MoreAs an advisor to private business owners, I often come across situations where an entrepreneur is conditioned to believing that the end-game is an outright sale of the business where they get a whopping pay day and nevermore have a care or worry in the world. This certainly can happen, but during the post-partum doldrums following a deal, we often hear business owners grimace that the financial transaction was not as satisfying as they thought it might be. They had a decent payout, but there's something missing. It could be boredom or separation anxiety that could have been averted with a more gradual exit. Sometimes we hear that they are concerned about the employees and the legacy they built. Cash is "King", but there are often intangible concerns and issues that can easily fall by the wayside because of an intense focus of squeezing every nickel out of the deal.
Read MoreBuyout transactions are structured in many ways to maximize a buyer's return and a seller's proceeds. Central to the successful buyout is balance. Balance, so the post-buyout company prospers for the investors and sellers, as well as other stakeholders including employees, suppliers and customers.
Read MoreRegardless of your political persuasion, most people agree that taxes for business owners are probably not heading anywhere other than up. This prophetic nugget, together with the fact that people tend to get older and not younger, suggests that entrepreneurs need to be more conscious about taxation as they evaluate ways to transition out of their businesses.
Read MoreThe most tax efficient and controlled ownership transition technique – an Employee Stock Ownership Plan or "ESOP" - has been around for over 35 years, yet it remains somewhat misunderstood. The idea of creating a buyer that is also a qualified retirement plan may not be inherently logical, yet it is this combination that makes the ESOP an ideal buyer for the right entrepreneur.
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