SES ESOP Strategies provides ESOP finance services to companies considering an ESOP and to established ESOPs. Our team has decades of experience in structuring and financing ESOP transactions and working with lenders of all types across the country. Most of our clients rely upon us to help them structure transactions through the ESOP feasibility study process. Many then engage us to raise ESOP financing through a competitive bid process or to assist in negotiating financing terms within an existing banking relationship.
How Are ESOP Transactions Financed?
In most ESOP transactions, the company will borrow from a bank as much money as can be borrowed without impairing the company’s ability to make debt payments or capital expenditures and without impairing the Company’s ability to manage a downturn in the economy. Depending upon the current debt of the company, this could be as much as three or four times the company’s earnings before interest, taxes, depreciation and amortization (EBITDA). This typically provides enough senior debt capacity to sell 40-60% of the company to an ESOP and permit the owner to withdraw that cash when the transaction closes.
Some owners desire to sell 100% of the company in one transaction. In that case, the value beyond what is available from third party financing sources is often financed by a seller note. The seller note typically provides for a total higher rate of return than banks will normally charge and, if structured properly, also gives the selling shareholder the ability to receive equity-like returns on a portion of the seller financing through a warrant.
Need help with ESOP financing? SES ESOP Strategies and its affiliated investment bank, Griffin Financial Group, provide a complete range of ESOP finance and consulting services to companies considering an ESOP and to established ESOPs.
Types of ESOP Financing Structures
Non-Leveraged ESOPs
Non-leveraged ESOPs are funded through company contributions of shares or cash to purchase shares. These contributions are then allocated to plan participants. A non-leveraged ESOP works as follows:
- Companies make tax-deductible contributions to the ESOP in the form of shares or cash to purchase shares. ESOP contributions are allocated to participant accounts
- When a contribution is made, it is allocated to participant accounts
- ESOPs allocated shares to each eligible employee every year, giving an employees an increasing ownership stake as they gain seniority
- The ESOP plan distributes the value of these share to employees to fund their retirement
Because non-leveraged ESOPs are not borrowing money to finance a large purchase of stock, there is no third-party or seller financing involved.
Leveraged ESOPs
Leveraged ESOPs differ from non-leveraged ESOPs in that instead of making yearly contributions of cash or shares, a loan is used to purchase a block of shares from the Company or its shareholders. An internal loan known as the “ESOP Loan” is put in place to allocate shares among the participants. In a leveraged ESOP:
- A company loans directly to an ESOP after borrowing from a lender
- The ESOP uses the loan proceeds to purchase a large block of shares from the company or from existing shareholders
- Purchased shares are held in a “Suspense Account” as collateral for the ESOP loan
- The ESOP loan is then paid from deductible company contributions
- With each loan payment, a tranche of shares are released from the suspense account and allocated to participant accounts. This is typically proportional based on eligible compensation
Not Yet Established ESOP Financing Services
If an ESOP seems like a viable path, we collect more information and complete the transaction analysis, which examines what the transaction and potential financing will look like. The process includes:
- Clarifying the company’s objectives (financial or otherwise) and exploring a broad range of strategic alternatives, including an ESOP, a leveraged management buyout, an old-to-young recapitalization, selling to a strategic or financial buyer or numerous other possibilities
- If an ESOP is the best choice for accomplishing company objectives, we begin examining the size, structure and financing terms to ensure the transaction is successful
- Along with assessing the impact of the ESOP on its shareholders, the sponsoring company, the employees and the ESOP itself, the company’s debt borrowing capacity and future cash flows must be taken into account. If applicable, we can help raise the debt necessary to fund the transaction
Additionally, we assist companies in the due diligence process to ensure a successful path forward and guide them through the process of choosing advisors, negotiating terms and conditions, and documenting and implementing the transaction
Established ESOP Financing Services
For companies that already have ESOPs in place, we provide a range of financing services to ensure optimal outcomes for our clients. We advise existing ESOP companies on:
- Financial modeling studies, including:
- Sustainability studies
- Alternatives to deal with repurchase liabilities
- Alternatives to deal with ineffective ESOPs
- Alternatives to help grow through acquisition or organically
- Feasibility studies for second-stage ESOP transactions
- Capital raises
- Recapitalizations
- Sale of an ESOP-owned company
- Designing synthetic equity and other compensation arrangements for senior executives
- Employee communications
- Financially stressed situations
How Our Team of ESOP Professionals Can Help
If you have made the strategic decision to initiate the design and installation of an ESOP, consider engaging SES ESOP Strategies to support you. Our team of experienced ESOP professionals integrates the finance, banking, tax and ERISA knowledge essential to effective ESOP creation and management. We have structured ESOPs in every possible way from the simple non-leveraged, non-control ESOP to a 100% leveraged ESOP. We have structured such buyouts with and without seller tax deferrals and have established hundreds of tax-efficient 100% S Corporation ESOPs.
Start the ESOP Financing Process Today
Whether your company is seeking to establish employee ownership, looking to maintain it or planning a sell-side transaction, our team can assist. We have numerous ESOP case studies showcasing a variety of scenarios, and we look forward to helping you with your ESOP financing needs.
Investment banking services are provided by SES affiliate Griffin Financial Group LLC, member FINRA, member SIPC, and legal services are provided by Stevens & Lee.