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Deals Surge for Small and Middle Market Companies; ESOP as Option

Deals Surge for Small and Middle Market Companies; ESOP as Option

While traditional M&A deals continue at full blast, advisers in the space are also touting — in certain circumstances — an alternative option to provide liquidity for owners looking to make their exit: ESOPs.

Per data cited by the National Center for Employee Ownership, more than 6,400 companies in the United States have an Employee Stock Ownership Plan, where essentially the company's workers own the business.

Companies with an ESOP structure will typically still have a management team in place, but the business is employee-owned.

ESOPs tend to be a good option for business owners looking for an exit where, for a variety of reasons, traditional buyers may be reluctant to make the acquisition, according to Alex Conti, a managing director of UHY Corporate Finance in Farmington Hills.

Companies with fairly low margins, smaller growth potential or those with more project-based books of business tend to stand out as good fits for ESOP candidates, he said.

"So there's challenging characteristics to a traditional M&A deal, and an ESOP is a great alternative for a business owner to actually get more in terms of value for the business," Conti said. "Albeit, some up front and the larger portion on the back end, or paid out over time. But it's just a great alternative to a traditional M&A deal for business owners."

Among those for whom an ESOP became a compelling proposition was Marty Easling, the founder and CEO of Easling Construction Co. in Leland, northwest of Traverse City.

Easling sold the close-knit company dating back nearly 50 years to his employees in a deal that closed at the end of 2019. In an interview, Easling told Crain's that other traditional dealmaking structures were explored, but the ESOP allowed for the best deal for all parties.

"This is the perfect solution for all the employees and for the company to keep going and take care of all our clients that we've developed over the years," he said. "It was just a perfect fit."

This article was originally published by Crain's Detroit Business


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