RESOURCES

ESOP Feasibility

Different types of feasibility studies are appropriate depending upon the business situation. In cases where workers are attempting to prevent a plant closing or trying to reopen a closed facility, a short and inexpensive ESOP pre-feasibility study, followed by an in-depth ESOP study, should be conducted.

It is important to determine if an employee-owned ESOP firm can be a competitive and viable player in the market. American Capital is prepared to conduct ESOP feasibility studies to help clients determine whether they should incur the time and expense to proceed with an ESOP transaction.

Full ESOP feasibility studies can take several months to complete, and are impractical in situations where firms are actively for sale and are soliciting bidders. Under these circumstances it is necessary to quickly assess the company's cost structure, the future of its industry, the quality of its management and the prospects for its market, in order to determine the ESOP options available to the employees. This is critical in enabling employee groups to compete on an equal footing with other bidders. A detriment to the creation of ESOPs in the past has been the sellers' perceptions that ESOP purchases take substantially longer to consummate that traditional transactions. American Capital conducts ESOP analyses on a timely basis and performs proper "due diligence" as required.

ESOP Feasibility studies typically contain the following elements:

Market Analysis

American Capital evaluates both the short and long term market potential for the ESOP company, including competitive pricing issues. This entails an analysis of the industry, forecasted demand for the ESOP company’s services, and a review of its potential customers. This analysis is integrated into the revenue section of the detailed ESOP financial model described below.

Competition

American Capital evaluates the current and future impact of competition on the ESOP company. The conclusions from this research are integrated into the revenue section of the detailed ESOP financial model described below.

Suppliers

American Capital assesses the future availability of supplies required for efficient operation of the ESOP company, including price trends and the probability of suppliers extending credit to the ESOP company. The conclusions from this research are integrated into the income statement and balance sheet section of the detailed ESOP financial model described below.

Facilities and Equipment

American Capital evaluates the facilities and equipment of the company in order to determine the future capital requirements of the ESOP company. The conclusions from this research are reflected in the capital expenditure section of the ESOP financial analysis described below.

ESOP Financial Analysis

American Capital gathers and reviews data to build an ESOP financial model of the company, the ESOP transaction and the ESOP company. The model integrates historical financial performance of the Company with future projections of the ESOP company and includes a detailed income statement, balance sheet, cash flow statement, valuation, and a detailed set of assumptions. The ESOP model will assist in evaluating the following issues:

ESOP Viability

American Capital analyzes the financial viability of the ESOP company. This will include analyzing the prospects of the ESOP company raising and/or generating enough capital to properly invest in plant and equipment, service any debt, and provide a market rate of return to any equity that may be needed to finance the ESOP transaction.

Fair Market Value

American Capital analyzes the fair market value of the company and the prudence of the ESOP Transaction under different capitalization and ESOP operating scenarios.

Productivity Improvements and Cost Reductions

American Capital evaluates whether productivity improvements and/or cost reductions will be required to successfully operate the ESOP company. If productivity improvements and/or cost reductions are necessary, American Capital evaluates the potential areas where they can be attained, and their impact on the ESOP company.

ESOP Financing

American Capital determines the structure of financing that will be required to support an ESOP transaction at any given price, and the ability of the ESOP company to meet these financial obligations in the future. Included with this analysis are an evaluation of the likelihood of obtaining the required financing for the ESOP transaction and the possible sources for such financing.

ESOP Ownership Structure

American Capital analyzes the allocation of ownership between equity investors, management and an ESOP, and the size and terms of each of their investment.

ESOP Feasibility Presentation

Upon completion of the ESOP Model, American Capital makes presentations on its initial conclusions concerning the viability of the ESOP company, the required ESOP financial structure, the potential of raising such financing, the required ESOP ownership structure, and the need for productivity improvements or cost reductions and the possible areas where such productivity improvements or cost reductions could be implemented in the ESOP company.

Submission of an ESOP Indication of Interest

If the parties wish to proceed, American Capital will prepares and submit an indication of interest in purchasing all or a portion of the Company.

Negotiation of the ESOP Letter of Intent

If an Indication of Interest has been submitted and the parties wish to enter into a Letter of Intent, American Capital is engaged under a separate agreement to assist in negotiating the Letter of Intent, preparing an ESOP financing and business plan, negotiating the definitive purchase agreement, raising financing, communicating with employees, structuring the ESOP company and consummating the ESOP transaction.

Preparation of an ESOP Financing and Business Plan

American Capital works with employees and the company to prepare an ESOP financing and business plan, and presentation materials that will be used in arranging financing for the ESOP transaction.

Employee Communication

American Capital works with employees and the company to communicate, educate and inform all employees about the status of the ESOP transaction, employee ownership, the structure of the ESOP transaction, the ESOP company, the ESOP, the business plan and their wages and benefits following the ESOP transaction.

Preparation of Management

American Capital works closely with the management, as needed, to prepare them to make presentations of the business plan directly to financial institutions for the purpose of raising financing for the ESOP transaction.

Definitive ESOP Purchase Agreement

American Capital assists employees and management in negotiating the various contracts establishing the terms of the ESOP transaction.

Raising ESOP Financing

American Capital raises financing for the ESOP transaction, including presentations to sources of senior debt, subordinated debt, and equity, and assists in negotiating with financial institutions over the terms of the ESOP financing. This work may be done in coordination with financial advisors to the owner(s).

Teaming with a Partner or Investor

American Capital works with employees and the company to negotiate the terms of the investment with any partner or investor necessary to consummate the ESOP transaction.

Creation of the ESOP Company

American Capital directs the efforts of employees and the company to establish the bylaws, articles of incorporation, and ownership and control structure of the ESOP Company.

Coordination

American Capital orchestrates the efforts of the financial institutions, partners or investors, ESOP valuation firms, accountants, legal counsels to the lenders, partners and investors, and any other professional ESOP advisers who may be required for the ESOP transaction.