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ESOPs in Mergers and Acquisitions

By July 28, 2020December 23rd, 2021No Comments

Companies with employee stock ownership plans (ESOPs) can enjoy significant tax and other advantages as compared to a non-ESOP company. One of the areas these benefits can be advantageous is in M&A transactions. These strategic acquisitions afford businesses the chance to acquire complementary businesses, improve efficiencies, and/or gain new employees all while potentially paying with pre-tax dollars. The economics of ESOP businesses are compelling. We’re rapidly seeing them rise to prominence in the world of M&A. Here’s how an ESOP may play a role in your M&A strategy.

ESOP Businesses: Superior Purchasers
ESOP-owned companies boast efficient cash flow, making them excellent acquirers, particularly now, when cash may be less accessible. ESOP companies boast many qualities that make them effective buyers:

  • They put employees first which generally leads to enhanced job satisfaction and operating efficiencies.
  • They are “friendly” buyers with less concern that the potential target employees’ jobs would be at risk.
  • Depending upon the tax structure (generally an S-Corp. ESOP), this means that instead of paying tax dollars to the government, these cash savings could accumulate on the company’s balance sheet and be used to finance M&A transactions.
  • Generally, the seller(s) can stay in place during a transition period or longer.
  • They are long-term focused and can stay the course.

Successful Acquisition Best Practices
Studies have shown that ESOP companies often enjoy greater success over the long run. However, just like any strategic acquisitions, these considerations can increase the odds of a successful acquisition:

  1. Avoid overpaying. Don’t allow frenetic excitement to drive up the price. Remain disciplined and focused on your acquisition strategy. The right financial analysis can help you ensure an appropriate return on the investment. Continually review your strategy throughout the process.
  2. Don’t lose focus on your business. An acquisition is demanding, but if you take your eye off of your business, the acquisition may not realize the value you hope. You may need to bring in extra assistance to ensure your business runs smoothly while you work on the acquisition. Your deal team also plays a key role in ensuring the deal is completed even when you must focus on operations in your current company.
  3. Avoid over-leveraging. Too much debt can destroy your business. Instead, you must understand how much capital to invest, and work with lenders you trust.
  4. Have an integration plan. Cultural considerations can kill a new business. You must have a realistic plan that reflects the realities of both businesses. Know that integration does not happen overnight.
  5. Address the ESOP. An ESOP can be a powerful motivator. For this to work, you must plan in advance how it will incentivize your team during the deal.

Even with consideration of these best practices, this doesn’t mean that these M&A deals are foolproof. As with any transaction, sage advice, intelligent financial modeling, and an expert team can help see things through to the finish line. Don’t rush the process, and invest in deal-making experts whom you can trust. Whether it is an ESOP or a typical M&A transaction, we welcome the opportunity to work together.

About Vision Point Capital
For over 20 years, our advisors have supported their clients with comprehensive advisory services to help them with their complex business valuation and business transition needs.

Our client’s personal goals are at the heart of everything we do. We are well versed in advising clients across a broad range of industries and help them manage and navigate valuation and all the business transition alternatives available to them. In fact, when you work with Vision Point Capital, you leverage our resources, experience, and expertise to help you grow faster and optimize value for reaching a successful business transition.