Mergers and Acquisitions: 5 Best Practices for ESOP Companies

Mergers and Acquisitions: 5 Best Practices for ESOP Companies

Amy CrouzerBy Amy Crouzer, CPA

Merging with or acquiring another company can be a way to achieve growth. A merger or acquisition can provide numerous benefits, including expanding your company’s product or service offering, geographic reach, and in-house talent, as well as achieving other strategic goals. But these transactions require careful consideration. This is especially true if your company is employee-owned through an employee stock ownership plan (ESOP).

Here are a few best practices ESOP companies should consider before moving ahead with a merger or acquisition.

  1. Determine which type of transaction suits your company best

Will you merge with or acquire another company? And if you plan to pursue an acquisition, will it be through a purchase of assets or a purchase of stock? If you choose the latter, you could purchase the stock with the IRC388(h)(10) election, meaning you would treat the stock purchase as an asset purchase for tax purposes.

It’s important to think through the liability and tax impacts of each type of transaction before you begin the process.

  1. Develop a strategy for the transaction

Now that you understand your options for the transaction, it’s wise to think through your goals for it as well. What are you looking to get out of a merger or acquisition? How will you achieve this? Taking time to build a strategy for the transaction—before you start shopping for companies—can save you time and help you make better decisions throughout the process.

Also, when you find a company to purchase, be sure to investigate the seller’s reason for selling. Knowing why the company is up for sale, among other things, can help you determine if it’s truly a good fit.

  1. Consider your ESOP-owned advantage

As an ESOP-owned company, you offer business owners a valuable benefit: the ability to become an ESOP where they might not otherwise be prepared or able to become an ESOP.  Depending on the transaction, an ESOP may also have some tax advantages related to mergers and acquisitions that are not available to a non-ESOP. For this reason, it is important to speak to an advisor early to get the transaction properly structured and take advantage of any potential tax benefits.

  1. Involve your ESOP trustee

Your ESOP trustee is the individual who looks out for the best interest of your shareholders. For this reason, it’s critical to involve the trustee early in the merger or acquisition process.

  1. Understand the impact of the merger or acquisition on your company and your valuation

A merger or acquisition may look good on paper, but in the real world it can be a different story. This is why due diligence is so critical. Make sure you review third-party financial statements and carefully consider the overall impact of the transaction on your stock. Assess positive and negative impacts of the transaction on your valuation. Evaluate how the transaction will impact your future cash flow and customer diversity. Consider hiring professionals to perform due diligence and help determine the impact on your valuation.

Does a merger or acquisition make sense for your ESOP company?

A merger or acquisition can represent a new chapter in your company’s growth, and this can be exciting to think about. But resist the urge to be caught up in the moment. Use these five best practices as a start and take time to think through the process. Like any purchase, the more you know about a potential merger or acquisition, the better.

Know your M&A options

If you’re considering a merger or acquisition, it’s important to fully understand your options. At JAK, we’re here to help. From gauging the overall tax impacts of each type of transaction to structuring the purchase and conducting due diligence, we can guide you through the process. As always, we’re here to answer any questions you have. Contact us today.

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