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And with that, I often get asked “What makes a good ESOP candidate? What do you look for
or listen for or see?” when I’m speaking with somebody and say “There are meetings
I walk out and I can walk out and say “Those folks are not ESOP candidates” and there
are folks I walk in and say “I’d be surprised if I’m not talking to them the following
week.”” And by the way, these are company attributes. The first thing I’m going to
put that’s not on this list is when I hear people talking about the word “legacy.”
I know I’m probably in the right room because people are trying to balance multiple concerns.
They’re not simply doing an Algebraic calculation. But good companies from a technical point
of view for ESOP typically a little less cyclical slow to medium growth companies; Very high
growth companies consume a lot of capital, have a lot of other goals and ambitions besides
sort of preservation study issue. They may or may not be the kind of boom or bust companies
are probably not good ESOP candidates. They may not be good candidates for much of anything
some time but boom and bust companies [inaudible 1:18].
We’re really looking for stable cash flow because the idea in ESOP that we’re going
to use an internal cash flow of the company ultimately to fund the [inaudible 1:28] whether
that through direct payment for stock to the former shareholders or indirectly by retiring
leverage in connection with the purchase of stock.
Typically, the owners of good ESOP candidates are folks with a longer term horizon. These
are not folks who are give-me-a-big-chunk-of-money-today-so-I-can-be-out-tomorrow. ESOPs tend to be as I-tend-to-call and barbecue
biased, lower and slower. They move a little bit more slowly. They’re designed to be
phased exits rather than out-the-door-tomorrow kinds of exits so when I talk to somebody
who says, “I really want to retire tomorrow. I want to be [inaudible 2:11], I need to have
this-is-my-nest-egg, I need it in cash, and there’s a real prospect of them selling
it for cash. They’re really on the wrong church. They ought to be talking to the MNA
folks and folks who sell businesses for a living to gain that cash.
They’ve said “Ownership groups that are concerned about employees, long term future
of the company motivated by “legacy” concerns, and finally, really often a lack of cash strategic
buyers willing to pay a significant premium. I had a number of situations where folks would
like to do in ESOP. They think it’s a great tool, great attributes, all of that when somebody
from the outside world is offering a 23-30-50% premium over the valuation of one can support
with the existing cash flow of the company. We can debate whether that’s a smart thing
or a bad thing but 90% of the time people that decide to take that premium one way or
another and arguably often they should. So that’s a hallmark to us if somebody who,
maybe a wonderful company but probably isn’t going to end up as an ESOP company. I have
a few exceptions to that where people have [inaudible 3:25] other goals. And again, if
check off the list, if you view this as a six-point list, most of the ESOP companies
we work with, at least hit four on the list. I mean it may not be that everybody hits all
six on the list but typically, they’re hitting at least a decent part of this.