Investment Banking

The principal investment banking feature dealing with an ESOP is the structuring and obtaining the funding of the "leverage ESOP loan".

SCS Clients

SCS's clients are middle market companies seeking to provide retirement incentives for employees. We provide this incentive through an ESOP by linking the performance of the company with employees' stock ownership. While the employees often times reap the benefits of company growth through company stock ownership, business owners also prosper because of the increase in company value and being able to sell significant blocks of company stock (usually 30% or more) to the ESOP with significant tax advantages.

Lending Experience

SCS has arranged countless leveraged loans for ESOPs. The factors contributing to the success of the ESOP loan, when contrasted to conventional "leverage buyout" (LBO) debt obligations, are as follows:

  1. Unlike LBO debt financing, a significant portion of the unrealized appreciation of an ESOP company remains unleveraged and, consequently, subordinated to the lender's position.

  2. The ESOP loan, to the extent it represents the present value of the future contribution in loan payments, adds nothing to the future cash commitments of the company.

  3. The ESOP participants represent a broader constituency than is represented in the typical LBO. The interest in preservation of earnings of a broad base of employees encourages increases in productivity necessary to sustain long term employment and loan repayment.

  4. The deferred distribution of plan benefits with respect to an ESOP tend to reduce employee turnover when contrasted to plans funded with easily liquidated securities.

Underwriting Profile

The typical SCS corporate client exploring the use of a leveraged ESOP has the following characteristics:

  1. Senior management/owners have a desire to diversify net worth by liquefying a portion of the unrealized appreciation of the firm.
  2. The tax basis of the owners' investment is low relative to the valuation of the company.
  3. Succession is not likely to fall exclusively to a family member.
  4. Corporation is a taxpayer, projected to benefit by tax-advantaged ESOP contributions and dividends.
  5. The company produces regular audited financial statements and debt service coverage for ESOP loan is demonstrable without aggressive growth assumptions.

In connection with the installation of an ESOP, SCS Management performs a valuation of the client's company to assure the fair market value for the company stock transactions with the ESOP.

SCS offers a Feasibility Study to determine the financing that would be possible for a Company seeking an ESOP loan. The Feasibility Study also explores the most advantageous ESOP design to meet a Company's objectives and a Preliminary Valuation of the Company.

Return to SCS Management Home Page

If you would be interested in a Feasibility Study for your company, or would like to discuss how the ESOP can work for you, please call
(858) 587-1300 or e-mail us at scsmanagement@sbcglobal.net