contacts

Bruce Mallory,
Platinum Group:
952.829.5700
bruce@pllc.com
www.theplatinumgrp.com

Timothy Ring,
Leonard, Street and Deinard:
612.335.1425
timothy.ring@leonard.com
www.leonard.com

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MANY BUSINESS OWNERS are singing the blues right now because they didn’t sell their businesses a couple years ago for a high valuation.  Now that times are tougher, owners can’t get their price — and many baby boomers are unable to retire as planned.  

A change of tune is possible by considering an employee stock ownership plan (ESOP) as an option to selling outright. This is an opportunity for owners to take the first step toward a transition out of the business by selling at least 30 percent of their company to employees. The resulting cash can allow them to start making lifestyle changes toward retirement or shifting into another venture.    

The time may be right to use this approach that allows owners to get money out of their businesses without giving up control. In today’s marketplace, this option can be less risky and more advantageous than selling to an outsider. And at a time when staffs have been downsized, this is a way for owners to say “thank you” to loyal employees for sticking with the company through a down economy.   

Surrender vs. control
The market environment is different from a few years ago in two key ways.  First, banks are not lending as much money to business buyers and private equity funds are paying less cash at closing. This has led sellers to cut deals with buyers for deferred payments. Second, the price that an outside buyer will pay for a business is lower today. Both impacts have made ESOPs a more favorable option.

 
Deferred payments can come in many flavors: a note from the seller, an earn-out tied to sales, royalties or consulting agreements. But if the business faces problems down the road, the seller can risk never seeing that money. Why not gain liquidity through a 30 percent ESOP where the owner is still in control of the future?

Depressed market values also bring ESOPs more in line with the sales prices of a few years ago or private equity valuations. In the past, a seller might get a seven-times multiple as a business valuation, based on earnings before interest, taxes, depreciation and amortization (EBITDA). A four-times multiple is more likely today, which is making blues singers out of owners who could have sold out for $21 million in 2007 but now can get only $12 million based on a $3 million EBIDTA. 

The real challenge for business owners is the ability to maximize net after-tax return on the sale. Too many sellers just look at the top-line price.  With higher risks and lower valuations in today’s market, it’s imperative to understand that an owner can actually receive higher net value proceeds through the deferral of taxes with an ESOP.