The ESOP Solution

We are often asked about Employee Stock Ownership Plans (ESOPs) as an exit strategy. For business owners who are curious about the ESOP exit option, here are links to two recent articles that discuss ESOP basics and some of the pro’s and cons of ESOPs. Both articles are from recent issues of MERGERS & ACQUISITIONS magazine, which is published in partnership with the Association for Corporate Growth, in which I am a member.

ESOPs have not been a big part of the M&A discussion for many years, but a confluence of recent factors is changing that.

More sellers are turning to the ESOP as an alternative to a traditional M&A transaction, as baby boomers look to sell their businesses, tax rates continue to increase and bankers become more comfortable with the ESOP option. Also, private equity firms are more frequently willing to invest alongside an ESOP transaction, as they look for ways to  differentiate themselves while buying into high-quality companies.

Executing Employee Stock Ownership Plans (ESOPs) may become more difficult because in the current marketplace, sellers can often achieve higher multiples by selling to a strategic buyer.

“I think an ESOP works for the most altruistic of sellers,” says Robert Brown, co-founder and managing director of Chicago investment bank Lincoln International.

“The multiple that an ESOP is able to pay is typically lower than a strategic buyer,” says Jason Bolt, senior associate at Columbia Financial Advisors, which provides business valuation and other financial advisory services.