Engineering Inc. - July/August 2004 - 27

to run without the family step- a bank loan, with the stock as ping in,
Blaha explains. collateral. A planned buyout over time, The big issue when
arrang- R i c e says, is more difficult, ing a leveraged buyout is the b e
c a u s e you don't have life c o m p e t i n g interests of the insurance
to fund it, so it has buyers and sellers. In a pro- t o come from corporate
fessional service firm, you have f u n d s . One option is an buyers who
have been with the E m p l o y e e Stock Ownership company for a long time
and Plan ESOP , a retirement plan w a n t to buy stock at a dis- that
allows companies to use c o u n t e d price, Matheson pretax dollars to
buy out signif- e x p l a i n s . In the meantime, icant blocks of stock.
Because you have founders who have ESOPs require a valuation con-
reinvested in the business, so sultant, they cost $10,000 to they want as
high a return as $ 1 5 , 0 0 0 per year to run in possible. Often the
attorneys a d d i t i o n to record-keeping g e t involved and write very
c o s t s and a setup fee of onerous buy/sell agreements, $ 4 0 , 0 0 0 -
t o $60,000 , and, w h i c h a prudent investor therefore, are generally
appro- probably would not sign. Since priate only for companies with t h e
value of the business is more than 40 people. If your based on the future
cash flow, firm is large enough to have an the owners need to ask them-
ESOP, I strongly urge that the selves, `What happens to the E S O P only
has a minority value of the firm if we lose our i n t e r e s t in the
firm, Getz second tier because the price is a d v i s e s , so that the
movers too high?' a n d shakers have a majority Matheson notes that valua-
interest. tion of the firm is not just a However it's done, Rice says, m a
t t e r of book value an Yo u want to get the larger engineering firm
really has a percentage of the stock to [the l o t of intangible value. So
future leaders], and a smaller what's needed is a holistic per- percentage
in the hands of the spective that encompasses the k e y technical people.
Junior b u s i n e s s and the human employees generally don't have
aspects of what you're trying the money to buy large chunks to accomplish.
And that cir- o f stock, so we have to help cles back to the importance of
them get the money through i d e n t i f y i n g a future crop of s t o c
k bonuses, or [enable b r o a d l y skilled leaders early t h e m ] to buy
the stock at a on. discounted value. Ultimately, Getz says, In order to get
the stock to T h e r e needs to be trust t h e junior employees, Getz b e t
w e e n the buyers and the e x p l a i n s , A firm has to be sellers. The
sellers have to trust f i n a n c i a l l y able to make the the second
generation is going transfer, because basically the to perform like they
said they funds have to come from the would. And the second genera- firm
itself. Even deferred com- t i o n needs to trust that the pensation plans
depend on the leaders will hand over power. financial health of the firm.
If You can't do an effective transi- you've delayed this process too t i o
n if you don't have that trust. long, you may need to arrange July l August
2004 ENGINEERING INC. 2 7
Engineering Inc. - July/August 2004

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