The Verit View – April 2012
Verit Advisors’ view is that demographic, social and current macro-economic factors are supportive of increased employee ownership strategies for privately held middle market businesses. We believe that these current conditions support increased ESOP formation transactions. About 11,000 companies have Employee Stock Ownership Plans (ESOPs). These plans cover approximately 10 million employees or 10% of the private sector workforce. Estimates suggest the number of ESOPs has remained static over the last ten years with new formations offsetting plan terminations.
The typical age of private business owners exploring and/or executing ownership changes is 50-69. This population cohort in the U.S. has increased 36% from 2000 to 2010 versus a 10% increase in the general population. Growth in population for the 50-69 year old cohort is expected to be 15% from 2010 to 2020 versus a 9% growth in the general population. The population growth rates are even more pronounced in the traditional retirement age bracket of 60-69 with population growth of 41% from 2000 to 2010 and expected growth of 34% from 2010 to 2020.
Unemployment is currently a prominent social and political issue. The unemployment rate in the U.S. of 8% to 10% since late 2008 is well above the 4% to 6% historical rates for the 15 years prior to 2008. A recent study conducted by the National Opinion Research Center at the University of Chicago supports the premise that employee owned companies have lower lay-offs. The General Social Survey released in February 2012 identified that 3% of employees at companies with employee ownership were laid off during the 2009-2010 downturn compared with a 12% rate for employees at companies without employee stock ownership. The survey also indicated lower turnover rates by noting that 13% of employees at firms with employee ownership intended to leave their employment in the coming months compared to a 24% rate for employees at firms without employee ownership.
Select Macro-Economic Factors
The increase in private business sales takes place at a time when traditional exit vehicles such as the public markets and private equity markets are under pressure from regulation and/or market volatility. The number and dollar volume of Initial Public Offerings under $100 million in size is down approximately 75% since the late 1990’s, likely from a combination of increased regulatory burdens from laws such as Sarbanes-Oxley and a decrease in the number of investment banks serving the middle-market. The Federal Reserve has recently undertaken numerous “quantitative easing” programs which have succeeded, for now, in lowering long-term interest rates about 100-200 basis points below the 10-year channel for both the 30-year treasury rate (currently around 3%) and Baa bond rates (currently around 5% ). These low interest rates are supportive of both valuation and financing requirements for ESOP transaction formation.
As always it is Verit’s vision to bring a fresh approach and customized solutions to advise private business owners on ownership transition.