What’s difference between an ESOP and an IPO?
- It gives the employees ownership in the company; and
- It immediately pays the owner out of his equity through a bank loan (repaid through company earnings).
Negatives are that the dollars raised are limited by what the bank will lend (typically conservative compared to the market value of the company), fairly rigid structure (little room for customizing), slow (2-5 months), IRS oversight, pledging of company assets as security, negative covenants.
Benefits are the relatively low cost to structure an ESOP, a tax advantaged way to lever the company, allows the seller to feel good about the sale (taking care of employees). Many banks are trying to expand their ESOP business, so the money is available.
An IPO achieves five objectives:
- Employees can get ownership in the company by earning or being gifted shares:
- An IPO sources capital for growth;
- Creates wealth (eg equity valued at 12 times versus 4 times multiple;
- Provides an exit strategy for the owner; and
- Allows huge financial flexibility (additional stock sales, stock buyback, issuing more stock, acquisitions, estate planning, and going private).
- Charismatic CEO;
- Clear growth strategy;
- Strong corporate structure;
- Clear and sensible use of the funds;
- Confidence in rapid growth; and
- A good “story” to tell.