Each unique project has the common goals of balancing the desire to maximize value, minimize taxation, initiate management succession and, above all else, providing for business continuity so the company can continue to serve its clients. Listed below are some examples of these projects.
The founder of a successful manufacturing business had sold a majority interest of the business to a private equity partner. Four years later, the private equity firm was looking to cash out of its investment and decided to sell the company. Management wanted to buy the company and the founder was interested in retaining a financial position in the company. Together, the founder and management team bought the company back.
The management buyout transaction ("MBO") allowed the private equity firm, the founder and the management team to achieve their goals:
- The private equity fund sold the business, which enabled it to raise another buyout fund
- The original founder kept a financial interest in the business by reinvesting in the MBO
- The management team got the opportunity to lead the company and create personal wealth
MBO and ESOP
A multinational corporation determined that one of its US divisions was no longer core to its long-term mission and hired an investment bank to auction the division. The management team developed a buyout plan that combined the management group and an ESOP. The ESOP provided a tax shield for 100% of the company's income, thereby freeing cash flow to repay the buyout transaction debt. The principals of Pilot Hill guided the management team through the financing, which included a direct investment, senior bank term loans and proceeds from a sale leaseback of the company's manufacturing facility.
The combined MBO/ESOP transaction allowed the parent company and management team to achieve their goals:
- Unlike most corporate sales, the ESOP structure provided the parent with the critical tax savings derived from a stock sale as opposed to an asset sale
- Management continued running the company and ended up with a much larger ownership stake than it would have teaming up with a financial sponsor
- The employees all had a stake in the outcome and the opportunity to share in the rewards of a successful buyout
The owner of a successful service business was nearing retirement but he desired to gradually reduce his management responsibilities with the company. Much of his wealth was held in the business and he knew it made sense to diversify his assets, but he wasn't ready to sell the entire business. Selling at the maximum price was also important.
The partial ESOP transaction allowed the parent company and management team to achieve their goals:
- The owner retained a controlling interest in his ownership of the company
- The transaction created liquidity that enabled the owner to diversify a large block of his wealth
- The ESOP structure efficiently reduced the buyout cost by allowing the company to take tax deductions for the repayment of the ESOP debt and the seller to indefinitely defer his capital gains taxes
- The employees enjoyed a new retirement benefit and incentive plan
A family-owned distribution company had created an ESOP years before to buy a minority block of stock from several family members. As the ownership broadened from one generation to the next, the stress of larger and larger dividend payments was creating financial pressure and managerial issues at the company. There were no longer any family members active in the company, so the family decided it was time to sell their stock and elected to maintain their legacy by selling it to their employees using the existing ESOP.
The 100% ESOP buyout allowed the family-owned company to achieve their goals:
- Using the ESOP, the family passed the business on to the employees that helped build it
- The family cashed out of their investment, which allowed for diversification and tax planning
- The 100% ESOP transaction resulted in a tax-free corporation which allowed for faster debt repayment
Mergers and Acquisitions Advisory
An existing client's company became 100% ESOP owned and at the first possible moment they elected to be taxed as an S-corporation. Given its only shareholder was now the ESOP – which is exempt from taxation -– the company reduced its cost base dramatically and began accumulating cash rapidly.
This tremendous advantage enabled the leadership team to accelerate growth by making strategic acquisitions. It set out looking for opportunities and identified a target that provided immediate access to distribution channels overseas. After completing due diligence and the valuation analysis, the deal closed. Due to its tax exempt status and strong cash flow, the company was able to repay the acquisition debt in three years.
An existing ESOP company was planning a second ESOP transaction. The company was growing rapidly and most of the stock purchased in the first sale was allocated. Prior to talking to its lenders, the company retained the partners of Pilot Hill to complete an ESOP repurchase and funding strategy study to forecast share repurchases. The study also proposed a funding strategy that would keep the company's benefits package at desired levels.
The repurchase and funding analysis helped the leadership team to:
- Estimate the number of shares and cost of account balances over the next ten years
- Evaluate the impact of the share repurchase funding program on the projected stock price
- Develop a funding plan that minimized large deviations from its desired funding targets
- Engineer an average ESOP account balance relative to its goals and that of the market