Why ESOP Owned Companies are Well Positioned for Acquisitions
Mature, well capitalized ESOPs should consider growth-through-acquisition as a key strategy in building enterprise value. In fact, studies indicate that an overwhelming majority of acquisitions by ESOPs are successful. One particular report found that 91% of ESOP acquisitions met the acquiring company’s expectations and 43% exceeded expectations. By comparison, 74% of non-ESOP acquisitions met the acquiring company’s expectations and 23% exceeded expectations.
There are a variety of reasons that acquiring as an ESOP is beneficial.
Strong organizational integration that comes about from employee ownership culture.
ESOPs are strong borrowers as they can finance deals with pre-tax dollars.
Upon completing a purchase, ESOPs can pay down debt faster. For non-ESOPs, typically only interest payments are deductible, however, both interest and principal are fully deductible for ESOPs.
ESOPs do not pay income taxes and thus benefit from bringing on future cash flows from an acquisition. This special tax treatment allows cash to grow on an ESOP company’s balance sheet more quickly than other strategic or financial buyers.
When structured correctly, ESOPs have a leg up during an auction process in competing against non-ESOP acquirers.
Acquisitions can increase the value of ESOP shares, and the ESOP can issue new shares or buy back shares already allocated.
In addition to these quantitative advantages, the typical benefits apply: namely, acquisitions help with the diversification of products and services, as well as geographic expansion and diversification.
While it is true that a majority of acquisitions by ESOPs are successful, they still must be done thoughtfully. Copper Run helps guide ESOPs by developing an acquisition strategy, identifying potential targets, providing valuations for actionable opportunities, conducting pre- and post-LOI due diligence and, ultimately, closing deals. Additionally, Copper Run educates sellers on using the IRS election provision (Code Section 1042) to maximize their sale proceeds.
Many of our clients see tremendous acquisition opportunities yet lack the experience and resources to develop and execute a strategy that meets their specific goals. Contact us to learn about how your company can leverage the ESOP structure to jumpstart growth.
Shawn Byerly is the Managing Director of Copper Run’s Cincinnati office. He is focused on providing the firm’s clients with mergers and acquisition advice in a variety of sectors including business services, manufacturing, distribution, healthcare, and logistics.