Our advisors reviewed new GovCon legislation and explored leveraged ESOPs as healthcare and staffing M&A alternatives in a series of new articles. Read ahead for their timely insights on employee ownership.
Federal News Network Features George Thacker
New NDAA Provision Shines a Bright Spotlight on ESOPs
The 2022 National Defense Authorization Act offers a new reason for government contractors to consideremployee stock ownership plans(ESOPs). The legislation’s Section 874 creates a five-year pilot program that enables 100% employee-owned, DoD contractors to receive sole-source follow-on contracts. It’s the first federal program to single-out ESOP-owned companies for contract advantages.
This is a victory for existing employee-owned contractors, as well as those considering a move to ESOP ownership. A long-favored mergers and acquisitions alternative among government contractors, ESOPs offer liquidity opportunities for shareholders, employee incentives and substantial tax benefits. The pilot program is expected to enhance this value proposition and encourage more firms to pursue ESOPs.
As Private Equity Scrutiny Increases, Physicians Consider ESOPs as Liquidity Alternatives
Mounting dissatisfaction with PE has fueled consideration of alternative liquidity transactions. An increasing number of healthcare firms have turned to unlikely M&A model: the employee stock ownership plan. An ESOP is a defined-contribution plan that mainly invests in employer stock. It effectively enables a tax-advantaged, leveraged buyout of physician-owners by a practice’s staff – in lieu of a PE firm doing the same.
There are several advantages to leveraged ESOPs:
A known buyer (an employee trust) purchases physician-owners’ stock atfair market value
Staff physicians and other team members earn stock over time, at no cost to themselves
Practices gain tax deductions equivalent to the ESOP sale value
A fully ESOP-owned practice can operate income-tax-free
A practice’s day-to-day operations remain unchanged
New Jersey Staffing Association Features Patrick Trask
Employee Ownership Offers Staffing Firms an M&A Alternative
Nearly 20% of all US employee stock ownership plans are sponsored by professional services companies. That includes staffing firms and HR consultancies. So what exactly is an ESOP, and why are these benefit strategies so prevalent among staffing industry companies?
AnESOPis an ERISA-authorized, defined contribution plan that invests in employer securities. You can also look at an employee stock ownership plan as a tax-advantaged leveraged buyout of your own company. In many cases, the primary driver for a leveraged ESOP is liquidity, but there are also tax efficiencies on multiple sides of the transaction. Staffing firms – because of their relatively high payrolls – are entitled toaccelerated tax deductionscompared to an average company.