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Case Study:ESOP Feasibility Study for a Multi-National Manufacturer
The majority shareholder for a large manufacturer was assessing his exit options from the company. SP&H was hired to determine if an ESOP provided this opportunity for the shareholder.
The ESOP feasibility study involved many analyses. The primary steps in the feasibility study were:
- Establishing the fair market value of the shares to be purchased by the ESOP
- Determining if the fair market value of the shares matched the selling shareholder's expectation of value
- Analyzing whether the company had sufficient, consistent cash flow to service any debt incurred in connection with establishing the ESOP
The manufacturer was a very unique company in a niche market, which posed interesting valuation challenges. The greatest challenge involved finding readily identifiable sales of businesses that provided products and services that were the same as the products and services provided by the manufacturer. After a thorough review of the manufacturer's operations and detailed analyses of the manufacturer's industry, regulatory environment, competition, and target markets, SP&H was able to identify and compile information on transactions involving similarly situated companies. This analysis played an important role in determining the fair market value of the ESOP shares.
To determine the feasibility of funding the ESOP, SP&H analyzed the company's financial growth and position. As the graph below illustrates, the business had experienced significant growth over the last several years, and consistently generated substantial cash flow that would be sufficient to service additional debt.
SP&H provided an opinion of value that was accurate, well supported, and fair to both the selling shareholder and the company's employees. Furthermore, when combined with the tax benefits of selling to an ESOP, the value determined by SP&H provided enough money for the company's shareholder to retire. Finally, SP&H's feasibility study showed that establishing the ESOP was practical and helped the shareholder determine how the ESOP purchase was going to be financed.
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