May 19, 2020
Congress and the Federal Reserve have already pumped trillions of dollars into the economy to limit the Coronavirus’s economic damage. Additional stimulus is likely. However, once the immediate crisis has passed, elected officials will face a debt reckoning. Their response could significantly alter how private businesses are valued, and how the owners of those companies asses their M&A opportunities.
In late April 2020, the Congressional Budget Office projected a nearly $4 trillion annual deficit. Despite inconsistent rhetoric from Washington regarding the ballooning national debt, lawmakers and the White House will ultimately be compelled to bridge the enormous gap between revenues and spending.
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Owners seeking immediate exits may still bite the bullet and turn to third-party sales (if opportunities arise). A client once told me, “It is not what you sell for, it is what you keep.” That sentiment certainly resonates today as economic futures are uncertain and a heavy portfolio concentration in one’s own business can be risky. But there's at least one alternative.
An already powerful liquidity tool, employee stock ownership plan transactions can create tax benefits for all stakeholders.
Even a 30% sale of shareholder equity to an ESOP trust (representing at least 10 employees) can yield these tax benefits. That’s especially useful for business owners seeking liquidity and diversification but who'd prefer to maintain a majority stake in their companies. Yet even in the event of a 100% ESOP sale, those owners can maintain potential upside (in the form of warrants) and play a leading role in the business moving forward. Furthermore, they retain the flexibility to sell to a third-party, down the road.
Higher taxes, coupled with a turbulent economic outlook, can limit a business’s opportunities to enhance cash flow. Stable, profitable, middle market companies may find that ESOP transactions represent an increasingly attractive path forward.
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