Florida Dealmaking:
Trends & Deals
Time is Right for ESOPs
September
13, 2003
In today's
business climate, business owners considering liquidity are facing
challenging times in the marketplace.
The reason: fewer buyers, with those active in the marketplace being
more discerning in their acquisitions. In addition, businesses are
receiving lower valuations compared to the historical values companies
received a few years ago. And, it is most unlikely that high values
will return to those record highs in the near future.
Facing this, how can an owner gain liquidity at their perceived
market value? An excellent avenue is an Employee Stock Option Plan
(ESOP).
ESOP VALUATIONS: Valuations of a company selling
to an ESOP are often higher than the value an owner might receive
selling to a third party. The reason is that ESOP acquisitions are
assigned an enhanced value is the reliance on the
discounted cash flow methodology used in ESOP valuations. This is
especially true in current times when market multiples are soft.
ESOPs ARE TRANSACTION - FRIENDLY: The timing to
organize and close an ESOP can be accomplished in as little as sixty
(60) days. This compares to selling a company that can take up to
four to eight months to closing. In an ESOP, owners do not have
to expose confidential operating data to potential buyers who may
also be competitors. And, employees are usually motivated with the
creation of an ESOP instead of being concerned when they find out
that their company is for sale.
CAPITAL GAINS DEFERRAL WITH ESOPs: One of the primary
features of an ESOP is the opportunity for the selling shareholder
to defer capital gains tax. So long as the ESOP owns 30% of the
company going forward, the selling shareholders can claim the capital
gains tax deferral relief. Because an owner can defer its capital
gains with an ESOP, this type of transaction has a built in premium
over selling to a third party.
OTHER ESOP BENEFITS:
- Retain operational control if desired
- Transition management over time
- Ability to sell a portion of the company (minimum 30% to
achieve favorable tax benefits)
- Ability to use pretax dollars to repay ESOP debt
- Reward and motivate employee base with ownership in business
- A full sale of the business to a third party can be executed
anytime when market conditions might prove more favorable.
Finally, with interest rates hanging near historic lows, the cost
of capital for a leveraged ESOP is compelling.
While banks have retrenched in many sectors, many remain aggressive
ESOP lenders in today's market.
PCE
Investment Bankers is a member of the PCE family of companies that
provide investment banking, valuations, advisory services, research
and Indexes.
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