Technical assistance grants from state agencies or the Federal Mediation and Conciliation Service or the Economic Development Administration, etc. Local benefactors, perhaps located through the union or mayors office. Foundations, churches, community fundraising efforts, and unions. Pro bono work by local business schools, firms and universities. Contingent fee arrangements with consultants if you move directly to the deal-structuring mode that includes a feasibility study.
Finding and Choosing Consultants Finding appropriate people can be difficult, but there are several good starting points. You can ask:. Nonprofit groups specializing in worker ownership, university business schools, union research and legal departments, and other employee ownership companies. State economic research offices that have contact with economists and business analysts or state departments that serve your industry departments of Commerce, Transportation, Forestry, Energy Commission, etc.
Unions, chambers of commerce or industry trade associations, whose members may have used business consultants. University MBA programs at which you can ask the dean whether students undertake business consulting projects.
Department heads of university marketing, finance, and business departments who may know the faculty who do this kind of work. The NCEO can also provide initial non-technical advice to members, including a discussion of available options. You should interview at least three different consultants. Once you have found one or more likely individuals or groups, there are several questions that you must ask.
Have they done feasibility studies for employee buyouts or subsidiary divestitures? Have they done financial modeling or prepared business plans? Can they get the study done within six to eight weeks depending on your time pressures? Are they willing to give opinions with caveats about issues for which all the data they would like are not available?
They must be independent of the seller and the company, meaning they have not done other work for either of those parties. Are they familiar with the law, Department of Labor regulations, and cases defining adequate consideration and fair market value? Have they valued stock in other companies in your industry? Other ESOPs?
Can they provide you with references? Do you and the attorney have compatible views on employee ownership and participation? Do they have experience in structuring employee buyout associations and contracts between such associations and other consultants? Organizational Answers to the following questions will help you determine whether you have a group of employees who can carry out a buyout.
Do you have leadership from the management side that can lead the management group during the buyout process and either is a potential CEO or can help you locate one? Have you created an employee buyout organization to assist with the pre-feasibility study, to make decisions about the steps to be taken in the buyout effort, and to raise money to take action?
Have you located resources to help you understand and carry out the employee buyout process? Do you have cooperation and leadership from the union, if there is one? Can your labor and management leaders cooperate on a major project? Market and Comparison Data Answers to these questions will help you determine whether the company is in a viable market. Obtain an overview of the industry and competition, including a forecast of demand and an assessment of market stability.
Much of the information you need to compare your company to its competitors is available in published analyses which you can find in a public or business school library or from industry experts.
Prime sources of data on your industry are available in libraries such as public business libraries, university libraries, or major bank libraries , from your company, or from the following sources:. Industrial Outlook annual. Industry experts whose opinions you should seek out include the following: 4 The analyst for the appropriate industry from the Bureau of Industrial Economics, Department of Commerce, Washington, D. Sources include local management, prospective management, industry publications and industry experts.
This assessment must be done by a competent and impartial outsider. The parties, labor and management alike, generally lack objectivity on this question. This generally requires a knowledgeable outsider who carefully listens to the parties and does independent research regarding the value of similar ideas tried at the target location and elsewhere. Identify means to improve the burden rate in comparison with competition. Assess the companys capability to assume estimating responsibility, particularly if estimating is currently done by its parent.
Financial The following items will help you determine a reasonable price for the company, whether its costs are competitive, and whether the new entity can afford the capital investment and working capital costs necessary to survive and compete.
The Full Feasibility Study: A Checklist A feasibility study will differ greatly depending on the type of company and its circumstances. The purpose of the following discussion is not to describe how to do a feasibility study. The specific steps vary significantly from case to case, and the employees certainly do not need to be able to perform the analyses.
Nevertheless, they do need to be concerned about whether the final product they receive as a feasibility study deals with the relevant issues, and they need to know how to interpret the results. There are four basic parts to the feasibility study:1 Market factorsthe demand for the product. The following sections describe the relevant points the consultant should investigate and the results that employees should seek.
It may be desirable to have a contract with a consultant that requires the following analyses Market Factorsa. Feasibility of Competition by a New Entity1. If not, are there channels it could easily adopt? Plant Factorsa. Whether large capital expenditures can be avoided, at least in the first three to five years, or if needed within that time can pay for themselves.
Which of the facilities for sale are needed by the employee-owned company and their maximum value to the new company. Is it willing to do so? This is determined by whether it can function as an independent facility without needing to be reorganized, whether it can be separated from current ownership without losing key suppliers or markets, and whether it can depend on having a committed management to lead it.
Financial Factorsa. Cost structure for last three to five years: for each product line, including costs of materials, labor, energy, maintenance, allocated overhead, and number of units of output. Cash flow for the last five years, using the data above on profits after tax computations , adding back depreciation expenses and subtracting out changes in working capital, department repayment, and capital expenditures.
If not, how much outside capital would be needed to finance them? For all of the above, the reasons why the company did or did not achieve these profit, output, and financing aims. Estimate future operating margins, profits, and streams of cash flows for three years, taking into account the effects of the changes in 1 immediately above.
Compute working capital needs. If there is no good basis to estimate working capital needs, an approximation would be total operating expenses for four months including rent, inventory, wages, leasehold improvements, and known interest costs plus reserve to carry accounts receivable plus petty cash.
These inside loans tend to have significant repayment terms—often 20 years or longer. Inside loans are an important mechanism in an ESOP transaction, as repayment of this loan releases shares held in suspense to participants of the trust. To repay this loan, the company will make annual cash contributions to the ESOP, with the ESOP then turning around and using that cash to make debt payments back to the company.
Given the circular nature of this loan, it is eliminated and is not reported as an asset for financial statement purposes. However, it is still a legally recognized loan, and cash should be contributed to the ESOP and returned to the company.
The ESOP structure for a sale transaction is complex and has multiple moving parts. In a typical ESOP transaction, selling shareholders will walk away with an initial cash payment for a certain percentage of their shares and selling shareholder notes for the remaining balance.
Any remaining balance is financed by the seller over a period of time, these seller notes are usually subordinate to any outside financing, and as such, they carry higher market interest rates. Given the cash constraints a leveraged buyout places on the company, many selling shareholders opt to provide more favorable financing terms in the form of below-market interest rates and longer repayment terms to the company.
This serves as a way to free up cash in the early post-transaction years in an effort to pay off all outside debts and still operate normally. In lieu of higher interest and a quicker repayment schedule, selling shareholders will frequently opt to take on warrants as part of the consideration for their shares.
Warrants provide an enhanced return to sellers and can be an effective tool in the ESOP transaction structure to generate necessary rates of return for the selling shareholders, lower initial cash interest payments on any seller financing, and allow selling shareholders to continue to participate in any company growth post-transaction. A warrant is a financial instrument and is almost identical to a stock option that grants the holder the right to purchase shares at a specified price at a future date.
Warrants are an enticing option for selling shareholders who believe in the future growth prospects of the company and want to participate in this potential upside after the sale if and when it is realized.
When it comes to warrants, the feasibility study will help determine the number of warrants provided to selling shareholders, set a strike price, work around any S-Corp single class of stock requirement issues the warrants could potentially create, and analyze the tax consequences of the warrants. The ESOP feasibility study brings together the thoughts, needs, and concerns of the multiple parties affected by the potential transaction. The study will consider the intended goals, initial questions, and interests of all parties to provide the roadmap which will serve as an important jumping-off point for the ESOP transaction process.
As the process evolves, it is highly likely that the circumstances surrounding the transaction may change. We have developed feasibility modeling templates to quantify this analysis. Our projections result in a thorough analysis of the alternatives available by quantifying the income tax, financial, accounting, and employee benefit issues. This software allows the user to model the future ESOP repurchase liability.
This is not a feasibility modeling software. It does not model the important aspects involved in a feasibility model. We would welcome the opportunity to discuss this further with you. Please call me at ext. I do not know of any available software product that evaluates the feasibility of an ESOP for a company. While I agree that it is important to involve an ESOP professional when evaluating the feasibility of an ESOP, I don't believe that the message board is an appropriate forum for the solicitation of business.
There also are about 3, profit sharing and to a much lesser extent stock bonus plans that are substantially invested in company stock and are like ESOPs in other ways.
In addition, we estimate that roughly 9 million employees participate in plans that provide stock options or other individual equity to most or all employees. Up to 5 million participate in k plans that are primarily invested in employer stock. As many as 11 million employees buy shares in their employer through employee stock purchase plans. Eliminating overlap, we estimate that approximately 32 million employees participate in an employee ownership plan. These numbers are estimates, but are probably conservative.
Although other plans now have substantial assets, most of the estimated 4, majority employee-owned companies have ESOPs. About two-thirds of ESOPs are used to provide a market for the shares of a departing owner of a profitable, closely held company. Most of the remainder are used either as a supplemental employee benefit plan or as a means to borrow money in a tax-favored manner.
In contrast, stock option or other equity compensation plans are used primarily in public firms as an employee benefit and in rapidly growing private companies. Companies that combine employee ownership with employee workplace participation programs show even more substantial gains in performance. Note, however, that participation plans alone have little impact on company performance.
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