https://www.channelfutures.com/wp-content/themes/channelfutures_child/assets/images/logo/footer-new-logo.png
  • Home
  • Technologies
    • Back
    • Analytics
    • Artificial Intelligence
    • Cloud
    • Data Centers
    • Desktop
    • IoT
    • Mobility
    • Networking
    • Open Source
    • RMM/PSA
    • Security
    • Virtualization
    • Voice/Connectivity
  • Strategy
    • Back
    • Best Practices
    • Business Models
    • Channel 101
    • Channel Programs
    • Channel Research
    • Digital Transformation
    • Diversity & Inclusion
    • Leadership
    • Mergers and Acquisitions
    • Sales & Marketing
    • Specialty Practices
  • MSSP Insider
    • Back
    • Business of Security
    • Cloud and Edge
    • Endpoint
    • Network
    • People and Careers
    • Training and Policies
  • MSP 501
    • Back
    • 2021 MSP 501 Application
    • 2020 MSP 501 Rankings
    • 2020 Hot 101 Rankings
    • 2020 MSP 501 Report
  • Intelligence
    • Back
    • Our Sponsors
    • From the Industry
    • Content Resources
    • COVID-19 Partner Help
    • Galleries
    • Podcasts
    • Reports
    • Videos
    • Webinars
    • White Papers
  • EMEA
  • Awards
    • Back
    • Excellence in Digital Services
    • 2021 MSP 501
    • Top Gun 51
  • Events
    • Back
    • CP Conference & Expo
    • Channel Partners Evolution
    • Channel Evolution Europe
    • Channel Partners Event Coverage
    • Webinars
  • Channel Mentor
    • Back
    • Channel Market Intelligence
    • Channel Educational Series
Channel Futures
  • NEWSLETTER
  • Home
  • Technologies
    • Back
    • Analytics
    • Artificial Intelligence
    • Cloud
    • Data Centers
    • Desktop
    • IoT
    • Mobility
    • Networking
    • Open Source
    • RMM/PSA
    • Security
    • Virtualization
    • Voice/Connectivity
  • Strategy
    • Back
    • Best Practices
    • Business Models
    • Channel 101
    • Channel Programs
    • Channel Research
    • Digital Transformation
    • Diversity & Inclusion
    • Leadership
    • Mergers and Acquisitions
    • Sales & Marketing
    • Specialty Practices
  • MSSP Insider
    • Back
    • Business of Security
    • Cloud and Edge
    • Endpoint
    • Network
    • People and Careers
    • Training and Policies
  • MSP 501
    • Back
    • 2021 MSP 501 Application
    • 2020 MSP 501 Rankings
    • 2020 Hot 101 Rankings
    • 2020 MSP 501 Report
  • Intelligence
    • Back
    • Our Sponsors
    • From the Industry
    • Content Resources
    • COVID-19 Partner Help
    • Galleries
    • Podcasts
    • Reports
    • Videos
    • Webinars
    • White Papers
  • EMEA
  • Awards
    • Back
    • Excellence in Digital Services
    • 2021 MSP 501
    • Top Gun 51
  • Events
    • Back
    • CP Conference & Expo
    • Channel Partners Evolution
    • Channel Evolution Europe
    • Channel Partners Event Coverage
    • Webinars
  • Channel Mentor
    • Back
    • Channel Market Intelligence
    • Channel Educational Series
    • Newsletter
  • REGISTER
  • MSPs
  • VARs / SIs
  • Digital Service Providers
  • Cloud Service Providers
  • CHANNEL PARTNERS ONLINE
 Channel Futures

Business Models


MSP Acquisitions: ESOPs (Employee Stock Ownership Plan) Explained

  • Written by Joe Panettieri 1
  • January 7, 2013
Plenty of managed services providers (MSPs) explore mergers and acquisitions. But if you look closely enough, you'll also see MSP owners exploring another exit strategy. It's called the ESOP (Employee Stock Ownership Plan). The idea: Sell some or all of the company to its employees -- the folks who built the business in the first place.

Plenty of managed services providers (MSPs) explore mergers and acquisitions. But if you look closely enough, you’ll also see MSP owners exploring another exit strategy. It’s called the ESOP (Employee Stock Ownership Plan). The idea: Sell some or all of the company to its employees — the folks who built the business in the first place. I first heard about the ESOP strategy from IT Solutions CEO Ted Swanson in 2011. But in recent weeks, I’ve heard from three MSPs that are considering the ESOP strategy. Here’s why.

Generally speaking, an ESOP can offer several key advantages, according to this Forbes article:

  • Low risk of layoffs;
  • Low risk of default on the acquisition debt; and
  • Tax advantages to combate rising rates on ordinary income and capital gains.

According to the National Center for Employee Ownership (NCEO), about 11,000 companies now have ESOP plans — covering 13 million employees. The NCEO says there are three uses for ESOPs:

  1. To buy the shares of a departing owner: Owners of privately held companies can use an ESOP to create a ready market for their shares. Under this approach, the company can make tax-deductible cash contributions to the ESOP to buy out an owner’s shares, or it can have the ESOP borrow money to buy the shares.
  2. To borrow money at a lower after-tax cost: ESOPs are unique among benefit plans in their ability to borrow money. The ESOP borrows cash, which it uses to buy company shares or shares of existing owners. The company then makes tax-deductible contributions to the ESOP to repay the loan, meaning both principal and interest are deductible.
  3. To create an additional employee benefit: A company can simply issue new or treasury shares to an ESOP, deducting their value (for up to 25% of covered pay) from taxable income. Or a company can contribute cash, buying shares from existing public or private owners. In public companies, which account for about 5% of the plans and about 40% of the plan participants, ESOPs are often used in conjunction with employee savings plans. Rather than matching employee savings with cash, the company will match them with stock from an ESOP, often at a higher matching level.

The NCEO says the cost of setting up an ESOP can be $40,000 or more.

Where can you go for help? While I hesitate to endorse anyone specifically, Monroe Capital might have some insights. The company, which focuses on mid-market and lower mid-market companies, has launched a national ESOP lending practice. It’s led by Managing Director Ty Dealy out of Atlanta, Ga.

Also, CSG Partners of New York and San Francisco has an ESOP practice — though I suspect most small MSPs operate below CSG’s radar. The company says it has completed more than 100 transactions for companies valued at over $7 billion — numbers that might be too lofty for SMB-focused MSPs.

For more background, the Menke Group — an ESOP advisor — has in-depth information about designing, activating and administering an ESOP plan.

One favor: If you explore an ESOP approach let me know. I’d like to hear what path your company ultimately selects (ESOP, M&A or something else…) and why.

 

Tags: Cloud Service Providers Digital Service Providers MSPs VARs/SIs Business Models MSP 501 Strategy

Related


  • Assessment
    CompTIA Rolls Out New Tech Vendor Assessment Tool
    Vendors may be overestimating their own channel readiness.
  • No Racism
    Racially Charged Tweet Costs Alteryx CRO His Job
    Numerous individuals, including a customer, criticized Alteryx for the tweet, which led to the CRO's resignation.
  • Select a Hire
    AvePoint Taps Ingram Micro, Palo Alto Networks Vet to Lead Channel
    He held channel exec roles at Ingram and Palo Alto Networks
  • Vendors: How Do You Measure a Partner Relationship?
    Vendors still struggle to gain a genuine insight into their partners’ needs. So what can they do?

2 comments

  1. Avatar George Thacker January 8, 2013 @ 10:51 pm
    Reply

    Joe,
    Our firm, CSG Partners, is working with two MSPs that are considering using an ESOP in 2013. There are two primary drivers: (1) creating a buyer for the owner's stock and (2) tax savings.

    With regard to the tax savings, with the increased income tax rates in 2013 most business owners will be losing 45%+ of the cash flow to income taxes (more in high tax states). By selling their stock to an ESOP, the owners can generate substantial tax savings. If a company is owned 100% by an ESOP and is structured as or converted into an S corporation, the business becomes non-taxable. By eliminating income taxes, this substantially increases the company's cash flow which can be used to pay down the transaction. Alternatively, the owner could sell a partial interest (e.g. 49%) and retain a controlling interest; in this situation, the company effectively gets a “bucket” of tax deductions equal to the sale value. For example, if a company sold $10MM of stock, this could create $10MM in income tax deductions. Often times this is enough to substantially reduce or eliminate their taxes for several years, thereby freeing up cash flow to service the transaction.

    Also, there are potential tax savings to the selling owner. In a traditional Mamp;A, the selling owner will have capital gains taxes- with the Federal rate increasing to 23.8% plus state taxes (often 5%+), this can be substantial. Depending on how the Mamp;A deal is structured, there can also be some items of ordinary income triggered. With an ESOP, depending on how it is structured, the selling owner can sell to the ESOP and elect not to pay capital gains taxes. Congress created this tax incentive to encourage owners to sell to an ESOP. There are several requirements that have to be meet.

    Long story short, an ESOP can be a very attractive liquidity and tax savings strategy for owners. However, it depends on the situation on whether an ESOP, traditional Mamp;A, or doing nothing is best. The key is getting into the numbers.

    George Thacker
    [email protected]

  2. Avatar Joe Panettieri January 11, 2013 @ 7:17 pm
    Reply

    George,

    Sorry about belated reply. I've been traveling. Thanks for offering all the tips in your comment. And also: Thanks for confirming CSG Partners has MSP knowledge. Good to hear. Please keep us posted and let the MSPmentor community know if those MSPs implement ESOPs in 2013.

    Joe Panettieri
    Editorial Director
    joe [at] NineLivesMediaInc [dot] com

Leave a comment Cancel reply

-or-

Log in with your Channel Futures account

Alternatively, post a comment by completing the form below:

Your email address will not be published. Required fields are marked *

Related Content

  • The Top IT Challenges Executives Will Face in 2021
  • The Smart Money’s on a Staged Approach to Security Services Provision
  • Xerox Financial Services Launches to Help Enterprise, SMB Customers
  • Protegrity Partners Get New Program with Added Training, Certification

Galleries

View all

Channel Partners Virtual 2021 Is the Hottest Ticket in Town

February 26, 2021

Industry Perspectives

View all

The “Roaring 20s” Are Coming

February 25, 2021

Three Ways MSPs Can Improve Supply Chain Security

February 24, 2021

SASE: The Key to Mitigating Business Transformation Risk

February 22, 2021

Webinars

View all

A Partner’s Perspective on Channel Success in 2021

March 17, 2021

XDR and Why it Matters to MSPs

March 24, 2021

Top Security Trends Impacting Technology Security Providers In 2021

March 25, 2021

White Papers

View all

Ready To Add Cutting Edge IoT Solutions To Your Portfolio?

  • 1
February 25, 2021

What Is The Value Of Distribution For The Internet Of Things?

February 25, 2021

The Internet of Things (IoT): Where do You Begin?

  • 1
February 25, 2021

Upcoming Events

View all

Channel Partners Virtual

March 2, 2021 - March 4, 2021

Channel Partners Conference & Expo

November 1, 2021 - November 4, 2021

Videos and Fastchats

View all

FASTCHAT: How SOAR Eliminates Security Challenges and Elevates Service Provider Revenues

January 6, 2021

Happy Holidays from Channel Partners & Channel Futures!

December 21, 2020

FASTCHAT: How Old, Unpatched Technologies Are Creating New Security Threats for MSPs and Their Customers

December 3, 2020

Twitter

ChannelFutures

Applying for the 2021 #MSP501? Check out our FAQs for everything you EVER wanted to know about applying & submittin… twitter.com/i/web/status/1…

March 1, 2021
ChannelFutures

Educate #WFH employees about #phishing and increase emphasis on cybersecurity to avoid a data breach, say @GiacomCM… twitter.com/i/web/status/1…

March 1, 2021
ChannelFutures

Amazon WorkSpaces @awscloud DaaS client will be available on @IGEL_Technology virtual endpoint client OS.… twitter.com/i/web/status/1…

February 26, 2021
ChannelFutures

.@VMware cutting more workers in California as part of ongoing #workforcerebalancing. #layoffs… twitter.com/i/web/status/1…

February 26, 2021
ChannelFutures

#CPVirtual is March 2-4. It’s the hottest ticket in town — any town, since it’s 100% online — so make sure you have… twitter.com/i/web/status/1…

February 26, 2021
ChannelFutures

.@datto, @ThreatLocker partner to streamline #MSP secure business operations. dlvr.it/RtYvJK https://t.co/nKGnwbblNO

February 26, 2021
ChannelFutures

Infographic: Why Partner with Sierra Wireless and GetWireless? dlvr.it/RtYh1m https://t.co/KcBFzXIx7l

February 26, 2021
ChannelFutures

Infographic: The Sierra Wireless Essential Series dlvr.it/RtYgxv https://t.co/CatxbRHzXr

February 26, 2021

MSSP Insider

Newsletters and Updates

Sign up for The Channel Report, Channel Futures Update, MSP 501 Newsletter and more.

Live Channel Events

Get the latest information on the next industry-leading Channel Partners event.

Channel Partners Online

Want more? Find more channel news and analysis on our sister site, Channel Partners.

Media Kit And Advertising

Want to reach our audience? Access our media kit

DISCOVER MORE FROM INFORMA TECH

  • Channel Partners Online
  • Channel Partners Events
  • MSP 501
  • MSSP Insider
  • IoT World Today
  • Webhostingtalk

WORKING WITH US

  • Contact
  • About us
  • Advertise
  • Newsletter

FOLLOW Channel Futures ON SOCIAL

  • Privacy
  • CCPA: “Do Not Sell My Data”
  • Cookie Policy
  • Terms
Copyright © 2021 Informa PLC. Informa PLC is registered in England and Wales with company number 8860726 whose registered and Head office is 5 Howick Place, London, SW1P 1WG.
This website uses cookies, including third party ones, to allow for analysis of how people use our website in order to improve your experience and our services. By continuing to use our website, you agree to the use of such cookies. Click here for more information on our Cookie Policy and Privacy Policy.
X