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W W W. M A I N E B I Z . B I Z 15 O C T O B E R 2 1 , 2 0 2 4 T he decision to transition a com- pany to an ESOP can make sense in several scenarios and benefit every- one involved. An ESOP transaction can create benefit options for dedi- cated employees in the form of an ESOP contribution, or for the com- pany to buy out an owner who plans to make a transition to retirement. Studies have shown that ESOP participants tend to have higher retire- ment account savings in comparison to non-ESOP counterparts and bet- ter job security. Whether you're a business owner considering your succession plan and options for funding your retirement or a potential employee business owner considering a buyout, an ESOP trans- action starts by building an advisory team including a banking partner who understands the nuances of ESOPs. Here's what to know as you research ESOPs and lending options. L e v e r a g e d E S O P v s . non-leveraged ESOP: In simple terms, if a company has the funds to purchase its stock outright it is non-leveraged, while stock purchased through financing is considered lever- aged. Over time, circumstances may change — companies that began as non-leveraged ESOPs may need to seek funding in the future. It's benefi- cial to understand how ESOP fund- ing works during the early stages of formation in the event that it's nec- essary in the future. Choosing the right lender: Not many banks have a deep understand- ing of ESOPs, so it's important to find a knowledgeable and trustwor- thy banking partner to support your company through the lending process. From a banking perspective, once an ESOP is formed, the ESOP has zero assets on the balance sheet. Gen- erally, the principal/owner intends to leave the company in the near future. is means the ESOP transaction hinges on partnering with a bank willing to look past a lack of guar- antors and a company that is — on paper — largely insolvent. For this reason, it's wise to start your ESOP process by reaching out to a lender that has an established his- tory and banking relationships with several ESOPs. Keep in mind that while ESOP funding can be sourced from any bank, or from the business seller, it can benefit your company to work with a lender that has expe- rience navigating the intricacies of ESOP transactions. ere are many options for struc- turing the buyout and finding one that benefits all parties (the seller, ESOP and the lender) takes a strong working relationship and a thorough understanding of the parties involved. A knowledgeable ESOP lender, working in tandem with your CPA, will be able to help walk you through the process of answering these questions: • What are the ESOP tax benefits and cash flow advantages for the new owners to repay the debt? What are the tax benefits to the selling busi- ness owner? • How does an ESOP affect cash flow? How does it reduce tax liability? How does it offer employees owner- ship and profit sharing as a benefit? • What requirements does a bank- ing partner want to see from the trans- action? (Such as a detailed business plan that includes management suc- cession, certain amount of cash flow, projected liquidity, etc.) • Is there a business formation that's more advantageous for transi- tion to an ESOP? (LLC, S-Corp, etc.). • Are there any federal loan pro- grams for ESOPs? Yes! In fact, in May 2023, the SBA reworked guidance to remove certain barriers that may have previously prevented some businesses from pursuing an ESOP. J a y H o o d i s c h i e f l e n d i n g o f f i c e r a t Ma chias S a vings Bank. How to find and work with a lender for ESOP financing B Y J A Y H O O D , M A C H I A S S A V I N G S B A N K B Y J A Y H O O D , M A C H I A S S A V I N G S B A N K H OW TO

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