The current M&A market for private companies is defined by consolidated buyers, says a new article, “The Power of the ESOP in Acquisitions,” by I-banker William Stewart (PCE Companies). Especially in today’s credit-strapped environment, ESOP-owned companies may be the most effective consolidators, given their “employee first” culture, their stronger qualifications for bank financing, the tax advantages to the selling shareholders, and the superior value of the target’s cash flow to the ESOP (as compared to the target).
For example, in “standard” acquisitions, the acquiring company will use the target’s earnings to repay any sale financing and other debt, with hopes of realizing additional return through the combined synergies and growth of the business. However, if the acquiring business is an ESOP, it can pay down the debt must faster by eliminating the target’s historical income tax, resulting in better returns. “These compelling economics are the biggest reason why we’ve seen companies that are owned by ESOPs become active acquirers,” Stewart writes. “In the best cases, the buyer wins with superior rate of return, the seller wins by maximizing after-tax proceeds, and the employees win by becoming owners through the ESOP.” And business appraisers can win by adding value to their compliance, consulting, transfer pricing and other services to their ESOP clients.