Understanding ESOPs (Part 3)

Aug 26, 2019

Surrounding oneself with the appropriate professionals, and planning accordingly, will position your company for a successful transition to ESOP ownership.

This article serves as a continuation of our “Understanding ESOPs” series, with Part 1 and Part 2 focusing on the tangible and intangible benefits of ESOPs. Here we look at the importance of education and planning when it comes to business succession.

Books and records – financial information. Wintrust ESOP Finance is one of the few national ESOP lenders that not only is involved in the structuring of the financing for an ESOP, but also manages the relationship with the ESOP-owned company after closing. A common part of our practice includes a “lessons learned” discussion with our clients to help other companies be best prepared for their ESOP transition. Among the most common responses are those focused on the preparation of financial information.

  • Make sure the company is in good standing in the states where it operates, as it may take an extended period to rectify.
  • Confirm all organization documents are up to date and allow for the contemplated transaction.
  • If financial statements consist of tax returns and company prepared statements, consider getting a review or an audit. The improved integrity of the financials will allow for a stronger valuation and/or reduce the amount of closing diligence.
  • Review current contracts to see if any Change of Control provisions exist. If so, the majority sale of a company will likely require consent in order to avoid a potential breach of contract. This, too, can take an extended period of time depending on the circumstance.

Management. Because the ESOP alternative allows a business owner to ease out of his position at his own pace, it is often viewed as the most flexible succession planning alternative. One essential way to insure this flexibility is to build the managerial bench. In order for the surviving company to succeed, there needs to be competent talent to fill the shoes of the departing owner, particularly in the scenario where the ESOP is a leveraged ESOP. As this process frequently takes months (and even years) to complete, planning the long-term management of a company should always be front and center.

Valuation. A common first step in an ESOP process is getting a feasibility study. It provides a business owner with a third-party perspective of potential ESOP structures, including valuation, plan structure, and financing. However, many business owners prefer to have a general valuation completed prior to initiating a transition process. It may sound counter-intuitive but doing so is ill-advised, for the following reasons:

  • Duplicative cost, as a valuation will be a part of the feasibility process.
  • Valuation drivers change based on the intended use of the valuation. Depending on the succession path desired, this may set inappropriate expectations.
  • The general valuation will need to be disclosed in the diligence process and any variations in value from this valuation will need to be addressed.

Professionals. When working through a succession plan such as an ESOP, it is important for a business owner to surround himself with professionals who are experienced in ESOPs. As a relationship-focused bank, we certainly appreciate loyalty amongst long-term business partners. However, utilizing attorneys, accountants, advisors, or bankers that are not regularly involved in ESOPs will not only put the transaction at risk, but will likely create elevated costs in completing the transaction.

Executing on a succession plan is typically a once-in-a-lifetime event. Just as a business takes years, often decades, to develop, a succession plan should be well planned for. Surrounding oneself with the appropriate professionals and planning accordingly will position your company for a successful transition to ESOP ownership.

Wintrust ESOP Finance and Wintrust CE&A look forward to participating in the 2019 M&A Next and 2019 Elevate AEC Conference in Las Vegas.

Wintrust Financial Corporation is a more than $30 billion financial services company headquartered in the Chicago area. With its national niche lending groups, including Wintrust ESOP Finance and Wintrust Construction, Engineering & Architecture, our experts have the knowledge and expertise to provide a business owner in the AEC space with a relationship-focused partner and key trusted advisor. Pat Stoltz and Jim Swabowski can be reached at pstoltz@wintrust.com and jswabowski@wintrust.com.

About Zweig Group

Zweig Group, three times on the Inc. 500/5000 list, is the industry leader and premiere authority in AEC firm management and marketing, the go-to source for data and research, and the leading provider of customized learning and training. Zweig Group exists to help AEC firms succeed in a complicated and challenging marketplace through services that include: Mergers & Acquisitions, Strategic Planning, Valuation, Executive Search, Board of Director Services, Ownership Transition, Marketing & Branding, and Business Development Training. The firm has offices in Dallas and Fayetteville, Arkansas.