SES ESOP Strategies 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 Griffin Financial Group, our affiliated FINRA-licensed investment bank, 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 percent of the company to an ESOP and permit the owner to withdraw that cash when the transaction closes.
Some owners desire to sell 100 percent 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.
Establishing and Financing an ESOP
- Help companies clarify their objectives (financial or otherwise) and explore 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
- This preliminary review may determine that an ESOP is not suitable, and in those cases, we can help owners determine the best alternative structure to fit their unique situations
- If an ESOP is the best choice for accomplishing company objectives, the process includes 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
- Assist companies in the due diligence process to ensure a successful path forward
- Assist in choosing advisors, negotiating terms and conditions, and documenting and implementing the transaction
- 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
- Sale of an ESOP-owned company
- Designing synthetic equity and other compensation arrangements for senior executives
- Employee communications
- Financially stressed situations
Investment banking services are provided by ESOP financing bank and SES affiliate Griffin Financial Group LLC, member FINRA, member SIPC.