Why build an ESOP when you can sell to one?

by Randy Rua | Nov 18, 2021

Employee Stock Ownership Plans (ESOPs) are more than just a fad. The benefits of having a plan by which a company’s capital stock is bought by its employees or workers are very real and tangible. In fact, NuVescor is currently helping two well-established ESOP’s grow through acquisition. We are also selling one of our manufacturing clients to a well-established ESOP.

Despite the benefits of ESOPs, there are some pitfalls. While setting up an ESOP from scratch can be an attractive option, getting an ESOP off the ground does not happen overnight – and creating one within your company can occupy lots of time and resources. For companies looking to enjoy those same benefits without the high startup costs and risk, selling to an ESOP can be a better alternative.

The problem with starting an ESOP from scratch

• High up-front costs – Setting up an ESOP can cost hundreds of thousands of dollars. It is also typically recommended the company has at least 50 employees and an established management team to run the business without the owner.
• Owner financial risk – On top of the regular up-front costs, owners often have to provide financing or personal guarantee bank financing to fund the purchase of the business. For owners who are looking for a comfortable succession plan, this brings added risk to their efforts to step away from the business.
• Major time investment – Most ESOPs don’t begin to run smoothly until several years after they have started. There’s also a major risk that getting an ESOP off the ground can become a major distraction and cause tension within the company – all while taking the focus away from core business activities.

The benefits of selling to an ESOP

• Avoiding the early pitfalls – Selling to a successful ESOP has a lower barrier of entry as there is safety in the size and resources of an established ESOP when it comes to managing companies and their assets.
• Step away sooner and more comfortably– If your business’s main reason for entertaining the idea of an ESOP is to set up a succession plan, selling to an ESOP provides a quicker and safer solution. If you’re selling to an established ESOP, your company will be able to start transitioning right away with a proven model rather than having to develop and troubleshoot its own. For owners who are looking to retire or move on from their businesses, this provides a quicker solution while providing confidence that the company is in good hands.
• Tax savings advantages– Sellers can save on taxes when selling to an ESOP, but that’s not the only advantage. Many ESOP’s do not pay federal tax. Therefore, an ESOP-owned company is more willing to buy stock in a C Corp because they don’t need the ability to depreciate the assets from an asset sale. If done correctly, the seller can take the proceeds from selling their stock and put them into other investments deferring any tax until they sell those investments. This allows them to have some control over when they pay federal taxes and how much money they want to pay so their CPA can help them put together a tax minimization strategy.
• Benefits to employees – Employees of the selling business become owners. Because of this, ESOP’s typically have better benefits and compensation for their employees than non-employee-owned companies. Most of our business owner clients would prefer to sell to their employees but this usually isn’t an option due to financing and the risks outlined above. Selling to an ESOP gives businesses the best of both worlds – employee ownership without the financial risks.

What we’ve seen at NuVescor

In our years of experience in manufacturing industry mergers and acquisitions, clients ask us to focus on ESOP buyers to provide their employees with the opportunity to be owners without having to find a way to finance the transition. The option to sell to ESOPs rather than start them from scratch also ensures sellers that the management is strong enough to operate the business without them. Meanwhile, the sellers, buyers, and employees involved in the ESOP enjoy the advantages that come with the major tax-saving opportunities.

For over a decade, NuVescor has been a leader in the Manufacturing Mergers & Acquisitions industry in Michigan. With years of experience and a proven process, our team delivers excellent results, whether you want to buy or sell a business.

If you’re looking to sell to an ESOP or if your ESOP is looking to grow through mergers and acquisitions, NuVescor can help. Click here to get in contact with us.

An Equity Strategy in Manufacturing M&A: What You Need to Know

by marketri_admin | Nov 16, 2021

The economy looks great for precision machine shop owners right now. For many, the biggest challenge is keeping up with demand. That doesn’t mean growth will be perpetual. Many owners are contemplating a sale now, when values are at record highs. Some, however, think they should keep growing the business to cash in later.

Owners should know that an equity-focused approach is best in this economy. The goal is to focus on maximizing wealth after taxes at retirement. Smaller manufacturing shops are high risk because of high concentration and low liquidity. In an increasingly consolidating industry, that’s doubly true. Your equity strategy can protect you.

So what do most owners get wrong? Many mistakenly believe that growing sales mean growing equity. But company valuations are complex, and ultimately depend on the individual factors the buyer cares about.

An Equity Strategy in a Consolidating Industry

Scale and capital are the powerful ingredients in the recipe for a successful supply chain company with good margins. You must look critically at your business, assessing financial and competitive strengths, the current financial cycle, and the route to the equity goal that is right for your company. There’s more than one way to get there.

Squeezing Profits

This fragmented industry is facing massive consolidation. Roughly the bottom third of competitors are unlikely to survive. Partnerships may be necessary as advanced technologies and automation increase the pressure. New competitive technologies can give you a strong advantage. Your management team needs a strong set of skills, and the ability to scale your company up.

PE-backed regional players invest for cost efficiency and attract strong talent. If you can’t afford these investments, you can get into trouble. Simply desiring to stay in business does not necessarily mean you should.

The Role of Private Equity

PE is currently looking to precision machining. The industry is fragmented, and ripe for consolidation. This is driving higher valuations, and multiple offers even on small companies. This suggests the cycle is peaking, and that the time to sell is now, not at some imaginary date in the future when things will be even better.

Companies that hope now tot exit the industry can avoid a sale by partnering with a stronger partner or PE firm to get more funding and build strength. PE-backed firms eventually sell on a five to seven year cycle, empowering owners and managers to sell at a higher multiple down the road. This may be a better option for owners’ long-term equity strategies, especially if they’re neither well positioned to sell nor well positioned to continue growing.

When it’s Time to Exit: M&A Considerations for Your Family-Owned Manufacturing Company

by Randy Rua | Jul 18, 2021

No matter how long you’ve been running your manufacturing business and how much you enjoy being at the helm, at some point you’ll decide it’s time to leave. Whether you’re ready to leave the work world altogether and sail off into retirement, or you want to move onto a new endeavor, the idea of exiting the business you’ve built and grown can feel overwhelming.

There are various approaches to exiting a family-owned business—and that’s one reason the idea can seem daunting. While there is no single best path, one thing is certain: Proper planning is key to a successful outcome for everyone involved. It also helps you avoid the difficulties that arise when a business owner dies before passing on the company or is forced to sell out of financial necessity. Yet, a PwC survey found that only 34 percent of family businesses have a well-developed, well-documented succession plan in place.

Let’s explore some options for planning the future of your family-owned manufacturing company.

Succession to the Next Generation

For owners of manufacturing companies who prefer to keep the business in the family, passing the torch to the next generation is an option. However, a smooth transition will require planning well ahead of your intended exit date.
Of course, you can’t assume there are family members who can simply take the reins. You’ll need to assess the available candidates to determine whether there is someone capable and interested in running the business. If you have one or more family members who are active in the business and interested in taking over, the selection process can be difficult and filled with emotion. Even when a clear winner emerges, you’ll need to groom them long enough to set them up for success.

Since the value of the business is likely to make up the lion’s share of your net worth, you’ll need to look at the financial ramifications of this approach. Determine if it’s feasible to structure a sale that’s based on a fair market value for the business and is still financially viable for your successor.

Succession Outside of the Family

The line of succession can be unclear in family businesses, especially if the heir you had in mind isn’t interested in taking over. When this happens, it may be best to look outside your family, and into the wider market, to identify a successor.

Transfer Through Living Trust

Some family business founders elect to transfer ownership of the company through a trust. This approach is useful for ensuring that if you become incapacitated, there will be a smooth transfer of control over the business.
Essentially, it involves transferring the company’s assets into a trust, naming an individual as the business’s successor, then naming that individual the trust’s successor trustee. The trustee then oversees the business in the event of your death, which helps to avoid protracted probate disputes and poor financial decisions by your heirs.

Transferring ownership of a business through a trust is a complex undertaking that presents advantages and disadvantages. If you’re considering this approach, you’ll want to consult with an accountant and an attorney who both have deep experience in advising family-owned businesses and setting up this type of trust.

Gifting the Business to Your Heirs

If you’re in the fortunate position that you don’t need the proceeds from the sale of your manufacturing business to retire comfortably, you could gift the company to one or more family members. To avoid paying gift tax on the value of the business, which could be significant, you need to understand the nuances of the current gift tax exclusions. This is another situation where it’s worth working with an accountant and an attorney who have extensive experience advising business owners on succession planning and gifting assets.

Sale of the Company

Many founders of family-owned manufacturing companies find that selling the business outright is the best option based on their current situation and goals. And while M&A activity has slowed from the record-breaking levels of 2021, due to headwinds like rising interests, high inflation, and general economic uncertainty, industry sources like Morgan Stanley expect deal activity will begin to accelerate in the latter half of 2023.

There are plenty of strategic companies and financial sponsors with sufficient capital to deploy, and that will present opportunities for A+ family-owned manufacturing companies that are ready to sell. In fact, PwC sees mid-market corporations and private equity (PE) firms taking a close look at middle market manufacturing businesses as a means to expand their platforms, reduce their risk, scale their operations, or achieve other important business goals.

Of course, if you opt to sell the business there are several paths you can take, including:

• Merging with another entity, such as a competitor or a business with complementary products or capabilities
• Selling to a PE firm or a strategic acquirer
• Completing a management buyout, in which your existing management team acquires the company

While selling the company can prove lucrative, it’s a complex and time-consuming undertaking filled with potential land mines. To navigate the process successfully and obtain the best deal price, terms, and structure, you need an experienced investment banking partner to guide you every step of the way. An investment banker that’s completed many successful deals in the manufacturing sector can prepare you for the sale process, help you maximize the value of the business before going to market, identify the right potential buyers, and lead you through the negotiations and the due diligence phase successfully.

How NuVescor Can Help

Owners of family-based manufacturing businesses in Michigan and across the country trust The NuVescor Group to help them develop and implement the right succession plan and achieve a smooth exit from the business. We’re a leader in manufacturing mergers and acquisitions, helping founders across a wide spectrum of manufacturing businesses find the right buyer, then guiding them through the process to achieve the optimal outcome.

NuVescor is the investment bank that middle market manufacturing companies turn to for sage advice required to maximize their value and support the transaction process every step of the way.

If you’re thinking about selling your family-owned manufacturing business or need help with succession planning, schedule a call to learn how our manufacturing M&A experts can help you achieve the best possible outcome!

Download the PDF: When it’s Time to Exit: M&A Considerations for Your Family-Owned Manufacturing Company

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