Rich and Co.

Reality Check: ESOPs for Retirement and Financial Advisors – Continuity, Not Price, May Be Optimized

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ESOP – Continuity Not Price May Be Optimized
Let us share some experience on an ESOP. It is actually best to assure management continuity and reward employees.  We have not seen it maximize the pay-out for the owner(s).  Additionally, it does burden the business and management with debt so usually demands cutbacks in expenses and compensation, immediate term.

An ESOP also may limit your flexibility in valuation since you are required to get an independent valuation, by the lender/bank, and limited to that number. Generally, that valuation is 1x revenue. an ESOP can pay a fair value (that is supportable to the DOL) for the business, but not a strategic value. Much of it comes down to learning the owner’s objectives. If it’s simply to get the highest price and the company is attractive, the ESOP may not be the best option.

Here is an example of a recent firm:

  • Valuation was $5mm
  • The owner funded a 30% payment, or let’s say $1.5mm
  • Debt service was $330k p/yr. for term of loan and include interest
  • This needed to be paid before additional payments to could be made
  • The owner also had to personally guarantee the debt
  • This created an extended payout period of 10-15 years.
  • So the business again is faced with needing growth to serve this debt. Growth or expense cuts.

This is not always optimal.


Written by Rich and Co.

July 9, 2012 at 8:06 pm

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