Employee stock ownership plan (ESOP) survey

The survey found that the most active industries pursuing ESOP transactions were industrials businesses, specifically within engineering and construction and value-add manufacturing. These industries represented approximately 50 percent of survey participants. Our experience indicates these tend to be the most active sectors due to significant human capital, outsized importance of legacy, lower marketplace valuations, and a number of other factors. Seventy-seven percent of participants within the engineering and construction and manufacturing industries viewed their ESOP transaction favorably.

Survey results further suggest that firms favored S-Corporation (S-Corp) ESOP transaction structures prior to the financial crisis in 2008, with C-Corporation (C-Corp) ESOP transactions subsequently increasing. A few reasons for this trend could be leverage considerations in the aftermath of the financial crisis, desire to retain direct equity, and significant changes in tax laws over the past few years.

Results also indicate that corporate structure election, industry group, and size all were correlated with an ESOP’s merger and acquisition (M&A) interest. Specifically, S-Corp ESOP companies were more likely to be acquisitive than their C-Corp counterparts, likely due to their tax-advantaged status and long-term capital structure mindset. Additionally, the engineering and construction industry was the most interested in future acquisitions, while the manufacturing industry was the least likely.

Finally, larger ESOP companies appeared more interested in pursuing growth organically and were not actively looking to make a near-term acquisition, perhaps implying they are more focused on modest growth, share repurchase obligations, and growing customer wallet share. All of the ESOP companies that made an acquisition currently viewed their ESOP favorably.

Interestingly, the survey indicated company satisfaction with the ESOP corporate structure wasn’t correlated with transaction leverage: Ninety percent of responding companies who used greater than three times debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) in their transaction viewed the ESOP favorably, compared with 84 percent overall. The group that was most dissatisfied with the ESOP transaction were recently established ESOPs, especially when benchmarked against ESOPs that had been established for 10-plus years, potentially implying that ESOP sentiment increases with time as the employee and corporate benefits are fully realized.

Specifically, C-Corp ESOP’s generally received higher valuations than their S-Corp counterparts, potentially due to high-growth companies utilizing the C-Corp ESOP structure as a partial liquidity tool to preserve upside for a future change-of-control transaction. Additionally, larger companies received higher valuations than smaller companies, demonstrating a significant size premium of approximately 17 percent.

The consumer products industry received the highest valuations in the survey—greater than 10 times EBITDA in their ESOP transactions. Of the 45 percent of companies in the survey that utilized an adviser, engineering and construction benefitted the most in terms of receiving a higher valuation than any other industry. The companies in this industry generated valuations two turns of EBITDA greater than their adviser-less counterparts.

Finally, the survey identified key focus areas for the ESOP community:

● Thirty two percent wanted greater lobbying for ESOP tax benefits

● Twenty six percent wanted enhanced education tools for ESOP plan participant awareness