The Ins and Outs of an ESOP Recapitalization

November 18, 2015


For many companies owned by a mature Employee Stock Ownership Plan (ESOP), their employee ownership is a source of pride, a central element of the company culture and a differentiator in the marketplace with clients. Maintaining employee ownership is a priority to the management team and to employees. Despite its importance to company culture, the ESOP structure can also inhibit the company’s ongoing growth initiatives and might conflict with the company’s immediate and long-term goals. Fortunately, ESOP ownership does not have to be an all or nothing endeavor. ESOP-owned companies can maintain the culture of employee ownership while optimizing the ESOP’s interest through a recapitalization.

For more on recapitalizations, read our blog article, “When should an ESOP-owned company pursue a recapitalization?

Understanding the process and timeline involved in a recapitalization empowers senior management, boards of directors, and trustees to make the best decision for the company and the ESOP participants. Similar to the structuring and funding of an initial sale to an ESOP, or any change-of-control transaction, enlisting the expertise and services of experienced professionals will position the company and its leadership for an efficient recapitalization.

While a recapitalization may not necessarily include a change of control, the company will likely utilize its corporate financial advisor to lead the transaction and coordinate efforts amongst the corporate legal team, and the trustee’s team of legal and financial advisors. Depending on the company’s capital needs, the corporate financial advisor will devise a plan to source and secure funds from outside lenders, which is commonly referred to as a capital raise process. Based on the company’s objectives and the capital needed, the timeline to complete a recapitalization can range from four to five months to a twelve-month engagement.

Pursuing a Recapitalization

Undergoing an ESOP recapitalization requires the approval of the board of directors and the trustee. When the company proposes a recapitalization involving a change in the ownership structure, it is effectively pursuing a transformative process. As a result, the company must provide ample evidence to the board of directors illustrating that the company will be better off with this transformative change, as opposed to maintaining the status quo.

Once the board approves the plan for a recapitalization, the company will need to demonstrate to the ESOP trustee that the board is in favor of this transformative change. The ESOP trustee needs to explicitly understand how the recapitalization benefits the company and the ESOP participants, and in turn allows the trustee to fulfill their fiduciary duties

Recapitalizations, like initial ESOP transactions, involve time, effort, and investing in qualified professionals. The benefit to the company can be tremendous and can free up capital for the company to remain competitive in the marketplace, find unique and meaningful incentives for top performers, pursue growth through acquisitions and invest in improved technology and resources, without necessarily sacrificing the culture of employee ownership. An ESOP company interested in exploring the benefits of a recapitalization for their situation should consult an experienced advisor.


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