Evaluating Offers to ESOP Companies: The Case for Engaging an Investment Banker

February 1, 2016
Mark B. Russell
Responding to Acquisition Offers in ESOP Companies

Neil Brozen’s article in this publication on responding to unsolicited offers to purchase ESOP companies notes that:

• The board of directors needs “to analyze the offer, perhaps with the assistance of a financial advisor.”
• “The trustee will encourage the board to engage an investment banker to evaluate the offer and develop a strategy to solicit other potential buyers.”
• “The trustee might tell the board it would like the board to seek other potential bidders as well.”

This advice is sound. Whether a company is ESOP-owned, family owned, or owned by a private equity fund, shareholders do better in a professionally managed competitive sales process than when negotiating with a single buyer. Shareholders receive significantly more consideration after running a sales process compared to the price that was offered before the competitive process was conducted. There is material support for this assertion. First and foremost is the fact that private equity firms that are regularly in the business of buying and selling portfolio companies almost always use investment bankers to help sell their portfolio companies. One recent survey of private equity firms active in the middle market found that private equity firms use an investment banker 94% of the time when selling their own middle-market portfolio companies. As further support, consider that this same study also found that private equity firms estimate that they end up paying 1x EBITDA (earnings before interest, taxes, depreciation and amortization) more on average when an investment banker is used by the seller (with answers ranging from 0.5x to 2x EBITDA, but never the same or less).

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