Plenty of business owners love the idea of an employee stock ownership plan (ESOP): preserving their company's legacy and culture, creating a gradual ownership transition plan while maintaining operational control, and rewarding the employees who built the business. But until you see exactly what an ESOP transaction would look like (on paper and with real numbers), it is hard for a business owner to decide to move forward.
GBQ Capital Advisors tackled that gap in its recent webinar, ESOP Feasibility Studies: Learning Whether (& How) An ESOP Could Work For Your Company. Two managing directors presented: Mr. Brian Bornino, CFA, CPA/ABV, CBA, and Ms. Serena Amlie, CFA, ASA. They walked through what an ESOP feasibility study includes and the amazing benefits it can provide for business owners considering an ESOP.
An ESOP feasibility study is a blueprint for a potential ESOP transaction. Using your actual financial performance and outlook, a feasibility study will answer all key questions related to how sellers, the company, key management, and employees would benefit from an ESOP. The goal is to provide business owners with the information to make a confident "go or no-go" decision.
Mr. Bornino compared it to building a house: you want to see the drawings before you hire the contractors and start building.
The study answers the questions owners ask most, from three angles:
Under the Employee Retirement Income Security Act (ERISA), an ESOP can pay no more than adequate consideration. For private company stock, that means fair market value determined in good faith by the trustee. Ms. Amlie noted that ESOPs can pay prices that are often competitive with third-party offers, especially after considering tax benefits and other forms of payment such as warrants and interest on seller notes.
The final price is negotiated with an independent ESOP trustee. The trustee hires a separate valuation firm, and the seller never sees that analysis. That’s why Ms. Amlie stressed that, when comparing ESOP advisory firms, sellers should look for an ESOP advisory firm that frequently works with ESOP trustees, such as GBQ, since we are familiar with how trustees and their ESOP valuation firms approach valuations.
GBQ Capital Advisors has extensive experience representing both sellers and trustees in ESOP transactions. As a result, GBQ's ESOP feasibility work follows the same rigorous approach a trustee’s appraiser will use, resulting in an accurate prediction of what an ESOP transaction would look like. Mr. Bornino was candid about the alternative: studies built on a quick earnings multiple can set expectations a negotiation can’t meet.
Very. Mr. Bornino estimated a typical ESOP involves 15 to 20 design choices, including:
The study also charts projected cash flow against debt payments to confirm the structure leaves a healthy cash flow cushion for the company to operate.
Not every company is a good fit for an ESOP, and a feasibility study is the clearest way to find out whether yours is. GBQ Capital Advisors’ ESOP Advisory team can help you weigh the real numbers against your goals for the business, your family, and your employees.
Talk to an expert about whether an ESOP feasibility study makes sense for your company.
A business valuation estimates what your company is worth. Feasibility studies go further. It shows how a deal could be structured and financed, when the seller gets paid, whether the company can afford the debt, and how employees would benefit.
ESOP-owned companies generally have an enterprise value of at least $2 million, Ms. Amlie said. Smaller companies can struggle to cover transactions and annual administration costs. Strong management beyond the owner helps, too.
Yes. An ESOP can pay up to fair market value for company stock, and seller notes can carry up to a market rate of interest. Because the price is negotiated with an independent trustee, realistic expectations matter.