The start of 2015 is just around the corner and it appears to be an excellent time to discuss Employee Stock Ownership Plans with existing business-owner clients and prospects. Why now? Because of the three major factors driving this opportunity:
Business valuations have been increasing.
Capital markets are more liquid.
The population continues to age.
Looking at each of these factors can help a financial professional approach their clients and prospects about the value of ESOPs.
Business valuations have been increasing
The recession negatively impacted the value of most businesses. As a result, the number of M&A transactions, including the formation of ESOPS, slowed dramatically. Business owners have been waiting for values to return to their pre-recession levels before moving forward with any type of sale.
We’re now seeing an improvement in valuations and profitability. According to Pratt’s Stats Private Deal Update, overall median valuations for businesses actually sold in 2013 were up relative to prior years. In addition, businesses sold in 2013 had returned to their pre-recession levels of profitability.
This increase in values will likely encourage more business owners to look at an ESOP as a succession strategy.
Capital markets are more liquid
The majority of ESOP transactions are leveraged, meaning they utilize some form of lending to create an immediate liquidity event for the selling shareholder(s). During the recession, the capital markets had become very illiquid, therefore making it difficult to obtain financing for an ESOP transaction.
Access to capital improved in 2014 as demonstrated by the following:
74 percent of small business owners say they have adequate access to capital.
93 percent of those who applied for a business loan in the past two years were approved, a 14% increase from 2013.
A more liquid capital market can make ESOPs more attractive as there is a greater likelihood of immediate liquidity and a reduced need for seller financing.
The population continues to age
The aging of America has been well documented. According to the Administration on Aging, current demographic shifts in the United States will continue for several decades. In 2012, there were 43.1 million Americans age 65 and above. This represents an increase of 7.6 million (21 percent) from 2002.
Of these older Americans, those who are business owners will need to access the value of their business to help maintain their current lifestyle into retirement. An ESOP allows them to transition ownership while maintaining control over the timing and extent of exit.
The future looks bright for ESOPs. Is it time to incorporate them into your practice?