Employee Stock Ownership Plans: A New Source of Capital?

By Steven Shill and Jay Powers

Employee Stock Ownership Plans (ESOPs) have proven themselves to be a successful company ownership structure for a wide variety of businesses. In an ESOP, owners sell to a benefit plan (the ESOP), and employees receive ownership in their employer company through a benefit account that vests over time. At retirement, this ownership interest is redeemed and the employee receives the proceeds from this redemption.

In environments ripe with restructuring and M&A, ESOPs may provide a viable option for addressing liquidity issues and raising capital, while also giving employees extra “skin in the game” that could translate to improved accountability, productivity and efficiency in operations. ESOPs may also be an important component of tax-efficient exit plans for business owners.

According to The National Center for Employee Ownership’s 2014 report, the top 100 employee-owned companies include five healthcare service businesses that are at least 50 percent ESOP owned. The ESOP-owned healthcare entities also include nursing homes, home care and ambulance services.

These include Acuity Healthcare, which announced that it was the first 100 percent employee-owned long-term acute care hospital company in the country in May 2014. As healthcare providers examine their finances in this era of healthcare redesign, ESOPs are being evaluated more and more by the industry as a potential alternative source of capital.

Although every entity’s dynamics and ownership structure are different, here are some broad points to think about when considering a leveraged ESOP as a source of capital:
  • For ESOPs to be successful, cash flow should be somewhat predictable. This is particularly important considering the somewhat turbulent environment caused by continued implementation of the ACA. In a changing environment, stability and strength in current cash flow becomes even more important.
  • Along these same lines, there shouldn’t be a significant amount of debt on the balance sheet. A baseline of earnings to repay the debt that funded the buyout is required to make sure the business is solvent.
  • Finally, there should be a critical mass in terms of the number of employees to justify a broad based ownership plan.
Though in existence for many years, ESOPs are a less utilized (but formidable) source of capital – broadly and within the healthcare industry – and could be an option worth considering given the right circumstances.