Like many successful technology companies, Forsythe Technology evolved over the years. Formed in 1971 as a provider of financing and leasing for technology equipment and products, Forsythe’s business model shifted toward information technology (IT) services.
In 2006, as the company prepared for the next growth phase, founder Rick Forsythe sought an exit. Forsythe already had a minority ESOP in place, and the employee ownership model positioned the company advantageously compared with other alternatives. As a result, the company redeemed Rick Forsythe’s shares, leaving the ESOP as the only shareholder.
For the selling shareholder, the ESOP provided liquidity and, as a friendly buyer, increased certainty to close and simplified the due diligence process.
For the company, “Tax advantages and an employee base motivated to ‘act like owners’ were positives,” recalls Al Weiss, chief financial officer at the time. “The ESOP also helped attract and retain employees resulting in voluntary turnover rates lower than other technology companies.”
Employees benefited as the ESOP transaction enabled the company to remain independent and provided an opportunity for them to gain meaningful ownership in the business.
Forsythe Partners with PNC During Period of Uncertainty
In 2014, Forsythe undertook a multi-phased project to enhance and complement its existing service capabilities. At that time, PNC was invited to participate in Forsythe’s senior credit facility to finance the project. Unfortunately, during the first half of 2015 it became evident that cash flows from the project materialized more slowly than anticipated, causing strain on the company’s cash flows and balance sheet.
To overcome these obstacles, the company decided that it needed to sell the partially-completed real estate while continuing its underlying business. By doing so, it was able to implement a new capital structure. While the company relied on its advisors during the asset sale, the PNC relationship team, including PNC ESOP Solutions, dug in to design a creative solution to meet the company’s needs.
In conjunction with the successful sale of the real estate, during the summer of 2016, the company selected PNC as Agent for a new asset-based credit facility. By leveraging the company’s strong collateral base, PNC’s structure reduced required amortization payments and improved its financial flexibility.
Weiss adds, “PNC stepped in aggressively at critical times, and always with the benefit of Forsythe in mind. They understood the ESOP, company and management very well, and provided a creative solution that was what we needed.”
The fact that the Company was 100% ESOP-owned was important given the unique considerations involved with this capital structure. It was important that the bank have a deep understanding of the nature of ESOPs. With the new capital structure in place, the company received an offer to purchase the company and, in 2017, Forsythe was acquired by Sirius Computer Solutions, Inc. (“Sirius”).
For more than 40 years, Forsythe adapted to and grew with the fast-changing technology environment. As an ESOP-owned company, Forsythe successfully transitioned into a “people business.” In pursuit of growth, the company invested in opportunities to enhance its competitive positioning. By partnering with advisors that understood Forsythe’s unique offering, capital structure and objectives, the company created significant value leading up to the acquisition by Sirius.
“Forsythe’s success ultimately benefited the employee-owners,” Weiss notes. “Their retirement accounts reflected a stock price that appreciated by more than seven times since the 2006 share purchase and experienced a compound annual growth rate in excess of 20% over the last 10 years. Employees appreciate the support PNC provided to enable such a successful sale.”
While ESOPs can have significant benefits for owners, management and employees, they are not the best strategy in every situation. As you consider an ESOP, ask yourself the following questions:
- Does your company have consistent earnings? ESOPs tend to be best suited for businesses with consistent and predictable earnings so that they are well-positioned to service the transaction debt and future repurchase obligation requirements.
- Are you anticipating compelling strategic offers? ESOPs can pay no more than fair market value for the stock. If the selling shareholder is seeking to maximize his or her sale price, then an ESOP may not be the best means to achieve this goal.
- Do you require upfront liquidity? When selling to an ESOP, a meaningful portion of the total sale proceeds may be deferred and paid to the seller over a period of time.
For More Information
Ask how PNC’s ESOP Solutions group helps companies transition to an ESOP structure and assists existing ESOP clients in maximizing performance. Contact Julie Williams at firstname.lastname@example.org or 616-771-8864