When Warren Equity Partners Vice President Michael Ouyang began the process of acquiring a business that's owned by an ESOP, the initial steps were to learn more about it. He says the firm wanted to understand:

  • When was the ESOP formed?
  • How many employees are participants and is management part of it?
  • Are there any sellers that are part of it?
  • How would the ESOP approval process and timing impact the process?
  • How can his firm tailor its pursuit of the company to the needs of the ESOP?
  • How can the firm work with the bankers and the sellers when it submits the letter of intent to get the ESOP trustee comfortable that the deal is the right deal?
  • And what the ESOP might be looking to do in terms of post-closing — transitioning into another plan — and how to make sure that's compliant and administered the right way?

Ouyang says some 5 to 10 percent of the companies in its deal flow have some kind of an ESOP. When they encounter one, the tendency is to partner with advisers that guide them in the process and they rely a lot of times on bankers to help facilitate the ESOP.

In a recent deal with a company with ESOP ownership, he says both the ESOP ownership, trustee, financial adviser and attorneys did not create complications or holdups in the negotiation of the transaction terms. Though the trustee, the financial adviser and the ESOP's attorneys did review and sign off on key transaction documentation and make a few recommend changes, the ESOP still was generally aligned with the way the sellers negotiated the terms.

"That's really helped by the fact that several sellers and management team members were ESOP participants," he says.

In the particular deal he referenced, he says there were a large number of employees participating in the ESOP. His firm was trying to balance structuring the deal in a way that the announcement of the deal does not go out prior to the optimal timing, which they accomplished by relying on the advisers, trustees and bankers to guide them through the process.

There were also no major differences in diligence documentation or from an overall deal perspective.

"We did have specific ESOP experts getting into the ESOP diligence, mostly around the formation of the ESOP, the compliance aspect of it, the administration of the ESOP day to day, and then really having a plan around what we're going to do with the ESOP post-closing, i.e. transitioning of the ESOP into another eligible plan," he says. "The reps & warranty insurance was really helpful because you run into issues when you have a traditional indemnity structure where it'd be difficult to make the ESOP fit into that, stand behind these reps. So, having reps and warranty insurance was helpful and getting the rep & warranty insurer comfortable with the level of diligence we conducted around compliance was also helpful for the transaction process."

Ouyang spoke at the 2021 Charlotte Smart Business Dealmakers Conference about the process his firm takes when targeting companies that have an ESOP ownership structure. Hit play to catch an excerpt from that discussion.