CHICAGO — Selling out to private equity or even a competing firm is not the only way to take some cash out of a plastics company.
Employee Stock Ownership Plans, or ESOPs, are a viable and sometimes overlooked path that provides an exit strategy, tax advantages and shareholder liquidity, according to Eitan Milstein, managing director of CSG Partners.
Milstein's firm specializes in ESOPs, mergers and acquisitions and capital advisory services.
Milstein told attendees of the Plastics Financial Summit, organized by Plastics News on June 3 in Chicago, that more than 11,500 companies in the United States have used ESOPs.
In the plastics business, they include PTA Plastics of Oxford, Conn.; New Age Industries Inc. of Southampton, Pa.; and Grand River Rubber & Plastics Co. of Ashtabula, Ohio, he reported.
“It's something to look at when you are considering a sale and figuring out what you want to do with yourself and the rest of your life,” Milstein said.
“It allows you to get liquidity as a shareholder. It's a very wise succession exercise because it allows you to groom, educate, bring in talent if you like, if you want to keep the company going,” he said.
ESOPs, over time, have become less mysterious and more commonplace. Milstein remembers a time when they were not readily understood by many bankers, lawyers and accountants.
“The banks have woken up to the fact that ESOP is a very, very efficient tool. Just about any financial institution now has a small group dedicated to looking for ESOP funding opportunities,” he said.
ESOPs essentially allow company owners to sell a portion or all of their firms to employees while still maintaining control of the operation.
“What's so good about ESOP? It allows you to get some chips off the table and you can get it in a tax efficient manner,” Milstein said.
ESOP laws, Milstein said, provide tax advantages compared with an outright sale of the firm to another entity and provides incentives for employees to work harder to make sure the company succeeds.
“What you've done is you've converted an employee to an owner. We know that owners work much harder than employees,” he said.
ESOPs also help companies attract and retain talent by providing them with an ownership stake in the firm, Milstein said.
The managing director likes the idea of owners keeping at least a portion of their firms to allow them to continue sharing in the upside profit, instead of simply receiving a paycheck, in the years after an ESOP takes hold.
Owners simply cannot decide to create an ESOP and charge whatever they want for the company, however, he said.
The creation of an ESOP is a negotiated transaction with outside representation for employees aimed at creating a fair market value for the firm. That gives the owner a fair price and gives employees protection, Milstein said.
“You need to be able to demonstrate and prove it was a negotiated transaction. The employees will be represented by a trustee,” Milstein said.
There are a lot of moving parts to creation of an ESOP, Milstein outlined at the conference.
But, he said, “It works exceedingly well.”