Executing Employee Stock Ownership Plans (ESOPs) may become more difficult because in the current marketplace, sellers can often achieve higher multiples by selling to a strategic buyer.

“I think an ESOP works for the most altruistic of sellers,” says Robert Brown, co-founder and managing director of Chicago investment bank Lincoln International.

“The multiple that an ESOP is able to pay is typically lower than a strategic buyer,” says Jason Bolt, senior associate at Columbia Financial Advisors, which provides business valuation and other financial advisory services.

Columbia has seen a lot of interest in ESOPs, but because the ESOP is a financial buyer, and there are so many strategic groups in the marketplace, the multiple that an ESOP group is able to pay is lower.

“In most cases in doing an ESOP you’re going to have a lower valuation than if you marketed the company,” says Brown.

Brown and Bolt were panelists, along with Andrew Greenberg, CEO of GF Data Resources LLC and Samir Desai, managing director of the Private Bank & Trust Co., at AM&AA’s Summer Conference.

The experts are also seeing ESOPs decide to go through with a sale after formation, which can cause problems, especially for companies with many employees.

Though a company will achieve a higher valuation through a transaction with a strategic buyer, that may not be what all sellers are looking for, says Keith Butcher, managing partner at St. Louis investment bank Butcher Joseph Hayes.

“While we certainly do not believe that an ESOP can match a true strategic multiple, we also believe that there are only a small number of companies that actually sell to strategic buyers or are purchase at a strategic multiple,” Butcher says.

However, ESOP plans can often offer advantages to sellers in terms of after-tax proceeds. 

Momentum behind ESOP transactions, as profiled in “Recaps Turn to ESOPs,” is still going strong, as owners look to preserve their legacies through the structure – which can also lead to community-based job preservation and tax benefits. 

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