ESOP Owned Companies: The Valentine’s Day Edition

It’s Valentine’s Day, love is in the air and ESOP owned companies have suitors lining up at their doors in the form of banks and other capital providers attempting to woo them.  The fact that ESOP owned companies outperformed their competitors during the most recent recession is only one of the reasons that ESOP owned companies are finding an array of capital providers eager to finance their growth plans, acquisitions or ESOP stock purchases.  ESOP owned companies are better borrowers due to their tax benefits as well as the continuity of the employee base and management team.  As this becomes more widely known, it is a great time for ESOP owned companies to explore their options for financing and to be sure that they are aligning themselves with the best partners as they continue to grow and transition ownership.

ESOPs are better credits

Over the past two years, the bright spotlight of banking regulators highlighted the troubled credits that banks held on their balance sheets.  While troubled mortgages made all of the headlines, the commercial credits fell under as much scrutiny as any of the other bank loans.  ESOP owned companies emerged as some of the premier credits in lender’s portfolios as they outperformed their peers in the harshest economic environment.

ESOP credits often outperform due to the tax benefits afforded to ESOP-owned companied, but the entire story goes beyond the tax incentives.  Employee tenure and productivity is higher in these companies which provides additional security for banks and other sources of capital.

Rates are low

The cost to borrow remains historically low and is forecasted to near record lows for the next few years.  The Federal Open Market Committee’s release in January of this year stated that it expects to keep the Fed Funds target rate between 0% – 0.25% through 2014.  While the market may expect rates to rise a bit earlier than that, one can be fairly certain that the cost to borrow will remain low in 2012 and likely into 2013.

Funds want to put money to workESOP chart

A silver lining in the cloud of the credit crisis was the emergence of alternative sources of capital that made their resources available to ESOP owned companies.  Private money raised for the explicit purpose of investing in privately held companies, such as subordinated lenders and private equity funds, helped fill the void left by the banks and found ESOP owned companies to be good partners.  The trend continues today with non-bank sources complimenting bank credit or substituting as senior debt or as riskier capital. ESOP-owned companies have become more attractive to these sources of capital for the same reasons banks like them.

Varied uses of capital

The best way to attract capital is to proactively seek the appropriate sources and to do so with purpose.  Capital is available to ESOP-owned companies to refinance existing debt, to expand the business either organically or through acquisition or to purchase additional stock for the ESOP.  Depending on the amount needed and for what purpose, a blend of capital providers may be needed.  The key to success in raising the appropriate capital is to present an organized plan that details the uses of the capital and the amount needed.  Affordable capital is out there to be raised for ESOP-owned companies; it’s just trying to find the appropriate match.

If you have comments or questions about this article, or would like more information on this subject matter, please contact us.
Will Stewart

Investment Banking | ESOP
Orlando Office

407-621-2100 (main)
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