ESOP Funding
How to Fund the Buyout of your Company
One fantastic aspect of selling your firm to your employees is that you don’t have to find a 3rd party buyer. (See our Video here. )
If you are selling your firm to an outside buyer, they will need to do their due diligence. They need to examine your books. They will scrutinize your customers. They will call your suppliers. With an ESOP, due diligence is done through a Trustee chosen by your employees. It should not be nearly as offensive.
ESOP Funding
How Can Employees Buy Out The Owner?
The employees DO NOT pay for the company. They DO NOT use their own money. They DO NOT use their 401Ks. They have no risk in this transaction – only upside.
Most ESOPs are funded with a mixture of outside debt along with seller notes.
Senior Debt
Outside debt could be a bank, like JP Morgan or Citibank, or it could be another type of institutional lender like a credit fund. These lenders will look at a company’s cash flow, assets and liabilities and determine how much they are willing to lend. These lenders are what we call Senior Debt (See Blog explaining how debt works), and the interest rate charged will be in the lower range.
Junior Debt
Seller Notes and MBO
No personal guarantees
Most business owner need to give a personal guarantee for a loan. The correct lenders will understand the tax benefits of ESOPs. They can provide money without a personal guarantee required. Here’s the reason:
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Loans taken out by an ESOP to buy a company are tax deductible.
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This means the company pays back the loan in pre-tax dollars.
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Pre-Tax dollars means it is less costly to the company
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The company balance sheet, along with the principle deductions should be strong enough to not require this guarantee. If they require it, we can raise less money or go to another lender.
Management Buyout
Interested in a Management Buyout?
Contact Us
Contact us if you have any questions.
We’re easy to reach and always happy to help
We invite you to call us with any questions you have or email us by filling out the form below. No question is too big or too small – whether you have a question about MBO Ventures or a question about ESOPs.
dgleeman@mboventures.com
Partner Phone: (646) 734-2035
40 Fulton Street, 17th floor
New York, NY 10038