The market the past several years has been pretty rough for private equity firms looking to exit from portfolio company investments. This has been particularly true for those firms focusing on the middle market. Multiples have been down, financing for buyers has been a challenge and limited partners are wondering when they’re going to see a return on their investments (or just the return of their capital).

Enter the ESOP. ESOPs (Employee Stock Ownership Plan) can provide an alternative for private equity firms seeking liquidity with respect to portfolio company investments while offering tremendous tax advantage efficiency.

ESOPs as an Exit Strategy

With an ESOP, all or part of the equity of the company is sold to an ESOP trust which is formed by the portfolio company. The price paid by the ESOP is determined by a valuation firm and is based upon fair market value. Depending upon the objectives of the seller, the ESOP may provide the means for a sale of the entire company or it can purchase only a portion of the equity, providing what, in many cases, is much-needed liquidity and the means to make a distribution to limited partners for the private equity firm.

These types of transactions can generally be closed much more quickly than typical sell-side transactions and provide an ongoing market for the company’s stock when the initial transaction is for less than 100% of the company. The ESOP structure promotes employee loyalty, as the employees of the company vest in an ownership interest over time. The financing required for this type of transaction can generally be structured with senior and subordinated debt.

At ButcherJoseph, we work with our clients to raise the capital required to close the transaction. We also help in structuring the overall transaction. In some cases, continued financial support from the private equity firm may be required for 100% transactions, but we work with clients to ensure the transaction eliminates or at least limits the need for that type of support.