PHOTO / COURTESY OF BELLVIEW ASSOCIATES
Susan Scherbel, founder of Bellview Associates, an investment firm that has worked with the majority of Maine companies making the conversion to ESOP ownership.
October 23, 2024
The payout: How it works on the front end
How does the payout work for the seller?
The answer is complex, says Susan Scherbel, founder and CEO at Ellsworth-based Bellview Associates, an ESOP consultant that is itself employee-owned.
In a non-ESOP sale, “You could simply come up with some mechanism where you sell the business to a group of employees or to a group of managers,” says Scherbel.
“The problem is — and this is where the payout comes in — that in order for that to happen, if the group is not bringing money to the table and is just relying on how much the company makes, you have to use after-tax dollars.”
Say the company is valued at $5 million. A non-ESOP sale would be subject to combined federal and state taxes of 45%, meaning that, in Maine the company would have to make about $10 million in order to pay half in taxes and half to the seller.
“That’s almost untenable,” says Scherbel. “It’s possible. But once someone does a deal like that — and we see a lot of that — they’re the walking dead. If something happens — say they find a superstar they want to hire or they need to invest in something — you can’t do that. All of your money is going to pay debt or taxes.”
By contrast, an ESOP sale gets a pass on federal and state taxes and the company gets to keep the $5 million.
“That is the magic sauce. That allows you to pay off the owner,” she says. “It’s like the government is saying, ‘We’re going to pay half of it for you. That’s why so many of these deals get done.”
ESOP ownership allows the company to retain a strong cash flow and allows employees to pay the seller without incurring personal obligations. Without the tax obligation, the payout to the owner can take half the time compared with a non-ESOP sale. In some cases, the ESOP ownership borrows money from a bank to finance part of the payout to the seller.
“I’ve seen deals where the people get bank financing for over half of the purchase price,” Scherbel says.
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