RESOURCES
ESOP Advantages
American Capital has been involved in more than 40 acquisitions, divestitures, valuations and funding of employee ownership and ESOP companies since its founding in 1986. Most of these transactions have been spin-offs of subsidiaries, divisions and product lines of Fortune 500 companies. Many have been asset purchases, and many have included long-term supply agreements. Each of American Capital’s ESOP transactions has resulted in democratically structured, employee-owned companies.
The selling corporations have included Borden, Inc., Sunbeam Corporation, U.S. Office of Personnel Management, Bolswessanen U.S.A., Penn Central, Campbell Soup, Northwest Airlines, Air Products & Chemicals, General Cable, Union Carbide, GenCorp, PPG, American Maize, Celotex and British Petroleum.
American Capital served as investment bankers in all of these transactions and provided financing for many of the transactions.
American Capital is involved in every aspect of creating and structuring the new employee owned business. Our responsibilities have included negotiating the terms of the acquisition, raising and negotiating terms of senior debt, subordinated debt, and equity financing, finding strategic and financial partners for an employee buyout, preparing business plans, hiring needed management personnel, structuring employee benefit plans, communicating with employees, conducting labor negotiations, negotiating long term supply and use agreements, managing the needed parties to consummate a closing, and, in general, orchestrating the entire transaction process. American Capital has also made senior debt, subordinated debt and equity investments as partners with the managers and employees in many of these ESOP transactions.
In addition to our considerable transaction experience, our principals have served as directors, financial advisors, and legal advisors to numerous ESOP companies and trustees. American Capital principals have served on the board of directors of 22 ESOP companies, most of them majority ESOP companies, including:
- Roy F. Weston
- Chance Coach
- Decorative Surfaces International
- L.A. Studios
- Biddeford Textile Corporation
- US Investigations Services
- Bliss-Salem Corporation
- CM Kemp Manufacturing Company
- Copper Range
- Erie Forge & Steel
- Four-S Corporation
- Indiana Steel and Wire
- Ironton Iron
- Kosins Clothes
- Martino's Bakery
- Aeriform (formerly IWECO, Inc.)
- McLouth Steel
- Mobile Tool International
- Northwest Steel & Wire
- North Coast Copper and Brass
- Oakmont Steel
- Textileather Corporation
American Capital principals have also provided financial advice and expert witness services in a number of ESOP litigation cases, which has provided us important insights into the fiduciary issues in multi-investor leveraged ESOP transactions.
American Capital has typically worked in the following areas:
Management and Employee Buyouts
When management and other employees wish to acquire their firm, an ESOP structured in the transaction will often eliminate tax obligations for over five years. Furthermore, an ESOP may make it possible to exchange ownership for employee-related cost reductions, often increasing cash flow dramatically. This combination of factors makes a management and employee buyout highly competitive compared to non-ESOP structured leveraged buyouts.
Read an article on how employee buyouts and ESOPs are accomplished:
Employee Buyouts of Corporations, Subsidiaries, Divisions or Product Lines
Retiring Owner
When an owner wants to sell closely held stock, management and other employees may provide an ideal market. An individual owner may permanently defer capital gains taxes by selling stock to an ESOP.
Mergers and Acquisitions
When a corporation merges with or acquires another firm and finances the transaction with debt, an ESOP may substantially reduce the price of the transaction, as well as financing costs.
Divestitures
Existing management and employees may provide an ideal market for a corporate divestiture of a subsidiary, division or product line. Taxes will be lower and cash flows higher, if the transaction is accomplished through an ESOP buyout.
Going Private
A corporation may wish to escape federal securities regulations and forego the expense and complication of being publicly held. Management may be able to take advantage of a market that undervalues a company's stock. An ESOP buyout may yield the highest price for the selling shareholders and reduce cash costs for the company. An ESOP may also create incentives that motivate employees to increase productivity.
Capital Expansion
An ESOP can be used to finance capital expansion, such as new plants and equipment, less expensively than conventional debt financing. With a properly structured ESOP taxes will be lower and cash flows higher than when funding the expansion using conventional means.
Takeover Defense
An ESOP can make an unfriendly takeover more difficult. Management and directors can more effectively leverage corporate assets and place a large block of shares in the hands of employees who are likely to be sympathetic to management objectives.
A Unique Strategy for Each Client
American Capital’s clients range from retiring owners who want to liquidate their stock to employee-management groups that want to buy their company. American Capital precisely determines each client's goals, then develops a strategy to achieve them. Every corporate transaction requires a different array of services that must be performed quickly and effectively to achieve success.
Orchestration
Perhaps the most important function of an investment banker in any corporate transaction is to orchestrate the work of the many participants. Most transactions involve a team of lawyers, accountants, valuators and bankers that must be carefully selected. The individual parties must be managed and evaluated at each step of the process, and each party's work must be coordinated and integrated with the whole.
ESOPs are a specialized tool of corporate finance. A small number of professionals are skilled in these transactions. American Capital regularly works with these experts and with offices throughout the United States can assemble an excellent team anywhere in the country.
Feasibility Study
A feasibility study can help a client make an informed go or no-go decision at an early stage in a proposed transaction. A thorough evaluation determines if an ESOP company would be viable and if a transaction could be financed. American Capital conducts feasibility studies to help clients decide whether to incur the time and expense of attempting a transaction.
Negotiations
Critical to any corporate transaction are the negotiations among the parties -- between buyer and seller, between management and hourly workers and with financial sources. Negotiations can break down or reach an impasse unless sensitivity and experience are brought to the table. American Capital has exceptional negotiating experience, particularly in union situations.
Business Plan
A comprehensive, well-reasoned business plan generally is necessary to finance a management or employee buyout, or even to finance capital expansion using an ESOP. A business plan specifically addresses the new entity's ability to service the cost of capital. American Capital carefully prepares this crucial document to give clients the greatest advantage in negotiations with sources of capital.
Client Financial Plan
American Capital works closely with clients to determine their current and future financial needs. Transaction decisions are based upon the financial and tax effects to the client as well as the impact on employees and the community.
Privatization
American Capital principals have been engaged in a range of domestic and international ESOP privatization projects since 1990. While most government downsizing results in layoffs and disruptions, the American Capital-led privatization of the Federal Government's Office of Personnel Management - Office of Investigation Services saved jobs and reduced costs to the government and taxpayers. The privatization has retained critical skills, provided seamless customer service to federal agencies, and helped make the new company (US Investigations Services) more diversified and market-oriented. This was an historic occasion. It is the first ever ESOP privatization, and resulted from a bipartisan consensus in Congress to make government more efficient.
American Capital possesses the skills, experience and capital to successfully complete employee buyouts, mergers and acquisitions, divestitures, valuations and refinancings. Should you require further information please contact us at info@AmericanCapital.com.