Eitan Milstein
- Thirty years in financial services, involved in M&A, recapitalization, acquisitions and restructuring transactions, in providing senior debt, junior capital and equity to middle market and large corporations.
- Managing Director of CSG Partners focusing on ESOP transactions.
- Senior Vice President of GE Capital Media, Communications & Entertainment unit.
- Founder and CEO of Access Credit Corporation, an equipment finance company specializing in municipal leasing, maritime finance and advisory services.
- Developed a residual option product and was actively involved in acquiring options in excess of $1.5 billion of original value.
- All 7 Best Practices
- Pre-Meeting Discovery Process
- One-on-One Call with Expert
- Meeting Summary Report
- Post-Meeting Engagement
ESOP Feasibility, Design and Implementation
Key Trends
- There's a growing awareness of ESOPs.
- The demand for ESOPs has never been as robust as it is now. Given the rise in taxation, the aging population and a buyers' market, you will be seeing and hearing much more about this under-appreciated and often-ignored liquidity alternative.
In the past, too many advisers – CPAs, lawyers and bankers – failed to recommend it because they thought it too confusing and complicated. Now, however, you see a much higher level of awareness among banks, which are much more interested in lending to ESOPs. CPAs also are becoming more aware of the benefits. - Business owners are looking for ways to protect and empower their employees.
- Most owners are often genuinely concerned about the well-being of their employees. They do care about their people and want to make sure their organization will continue to perform. It's never just, “I want to get liquidity and I don't care.” It's, “I want to make sure that people keep their jobs and it will be nice to share the wealth with the employees, but how do I do that?” ESOP is a solution that allows you to accomplish both.
We just did a transaction with an engineering consulting firm with more than 200 employees. The owner and his partners are nearing 60. There was no desire to sell to a third party because many of the employees would likely lose their jobs. This solution allowed him to stick around for a while, make sure the ESOP conversion was done correctly, and walk away with a lot of tax-free cash. - Changes in the federal tax code may make sheltering income more important.
Most merger-and-acquisition transactions are done as an asset sale. If a business owner has a low tax basis in a company, every dollar above that basis is subject to ordinary income tax. And when federal, state and possibly local rates are combined, we're talking rates of 50 percent-plus. If the deal is done as a stock sale, the owner has to pay capital gains tax, which is climbing towards 40 percent in states like California and New York. Even in no-income-tax states like Florida, Nevada, and Texas, we're seeing more ESOP transactions.
- ESOP companies are demonstrating success.
Rutgers University has been following ESOPs from their early days. According to Rutgers' studies, the average productivity for an ESOP company versus a non-ESOP company is about 2.5 percent higher. Profitability is about 10 percent higher.
During the recent Great Recession, 12 percent of businesses in the U.S. laid off people. But only 1 percent or so of ESOP companies went through the same exercise. All told, it's a very positive track record.- Merger-and-acquisition multiples haven't returned to peak levels.
- Before the financial crisis, as the market was flooded with money, buyers were willing to pay exceedingly high prices. Then came the recession, and a few things happened. Banks pulled back. Private equity firms try to put in as little equity as possible and borrow as much as they can. The offers got smaller. Business owners thought, “I'll wait to sell until things come back to normal.” And of course, it hasn't happened, and the offers remain much lower. Some business owners today are even considering liquidating rather than selling. An ESOP is a very attractive alternative to a sale.