In conservative communities like Wisconsin, business owners approaching retirement often contemplate transitioning their company to their employees. For good reason – who is better suited to safeguard a company’s future than the team already in place? While an Employee Stock Ownership Plan (ESOP) can work well to accomplish this goal, this structure can be impractical for many small companies. And in those cases, a Management Buyout (MBO) can be a great alternative.
Truly, an ESOP has many attractive features. It provides some liquidity to owners while gradually transitioning the business to employees, helping to ensure peak performance and aligned interests. An ESOP also avoids the ‘auction’ process inherent in selling a business, thereby keeping private the company’s financial performance and other confidential information. Perhaps more compelling are an ESOP’s distinct economic benefits, as regulated by ERISA and the Internal Revenue Code. For instance, provided certain conditions are met, an ESOP can reduce a seller’s tax burden by deferring capital gains. An ESOP can also reduce the company’s ongoing tax burden, for example, by permitting the repayment of the transaction’s debt through pre-tax contributions. Nonetheless, for reasons varying from cost and management talent, to plan restrictions and employee comfort levels with ownership, many small business owners decide an ESOP is not a good fit.
In such instances, an MBO can be a perfect – and far more flexible – solution. As with an ESOP, liquidity is obtained and management gains ownership without creating noise or disturbances in the marketplace. From an economic perspective, while an MBO loses the ESOP’s tax benefits, it also removes the regulatory burdens and constraints which always accompany such ‘perks’. For instance, an MBO has no restrictions complicating ongoing ownership interests for family members and other major shareholders, as does an ESOP. Additionally, the absence of ESOP trustees, and their fiduciary obligations to plan participants, enables an MBO to be less conservatively managed. Even the mere presence of an ESOP’s mandatory annual valuation can retard planned investment out of concern for short-term dips in cash flow. These and other considerations make MBOs far more flexible than ESOPs — and flexibility is something private equity investors and talented management teams all find attractive!
Of course, many private equity shops won’t consider investments in companies with EBITDA below $2 million, unless it’s part of a plan to synergistically ‘bolt-on’ the business to a larger portfolio company. As a result, Progress Capital Group’s focus on small businesses as THE PLATFORM FOR GROWTH is what sets us apart.
Progress Capital Group is actively seeking MBO opportunities — and especially situations where an ESOP is not practical due to the company’s size or other factors. We aim to partner with strong management teams, providing capital and other resources needed to take companies to the next level. If this describes a situation you know, let’s get acquainted and discuss the opportunity. We look forward to hearing from you soon!