In December 2016, Westchester, Ill.-based Regent Surgical Health, an ASC manager, sold 100 percent of its common stock to its employees by creating an employee stock ownership plan, or ESOP.
Executives from Regent Surgical Health and leaders in JPMorgan Chase's ESOP Advisory Group spoke during a panel at Becker's 16th Annual Future of Spine + The Spine, Orthopedic and Pain Management-Driven ASC Conference in Chicago about the challenges and benefits of an ESOP transaction.
Panel participants included:
- Tom Mallon, chairman and founder, Regent Surgical Health
- Eric Zaiman, executive director, commercial banking, JPMorgan Chase
- Brian Jenkins, executive director, ESOP 1042 financial adviser, JPMorgan Securities
- Chris Bishop, CEO, Regent Surgical Health
- Moderated by: Danny Resnick, executive director and financial adviser, JPMorgan Securities
Here are four quotes on Regent's ESOP transaction from the June 15 panel:
1. Mr. Mallon on what advice he would give to someone interested in an ESOP: "[We had] an offer from a strategic company, an excellent company. They were going to give us a fair deal for the sellers, and they were going to put an $8 million opportunity out there for the senior management team if they did what we have done for 15 years, which is add two centers a year.
"I looked at them and said, 'That sounds pretty good.' … Well, if you run the numbers on the ESOP, your upside on the five-year time horizon is $17 million. Now, do you want to be in charge of your own destiny? Do you want to maintain your culture? Do you want to continue serving your current customers … or do you want to turn it over to the man and work for an international healthcare corporation where you are just a little sliver of what they do? And [management] had the good sense to say that we'd rather row our own boat."
2. Mr. Bishop on how employees reacted to gaining ownership in Regent: "The major win is, and not everyone on the team has gotten there yet, but a lot of these folks are starting to view this as ownership — this is mine. We were in a conference room one day talking about something regarding the ESOP. I was talking about flying to New York the next day to pitch a project, and one lady raised her hand and said, 'Why are you flying? Why can't you take the bus? Wouldn't that be a lot less expensive?' That's the mentality — she didn't care before if I flew first class or coach. These folks are starting to think of [Regent] as 'mine.'"
3. Mr. Zaiman on the typical financial structure of an ESOP transaction: "The transaction is financed at 100 percent debt, which is something most of you have probably never heard of or thought possible. The reason to do that is because it's all embedded in the tax code. The tax code provides very wonderful benefits to companies that are 100 percent ESOP-owned and elect to be taxed as an S-corporation. Those companies effectively are tax-free because the ESOP … is exempt from federal, and in most cases, state income taxes. In an S-corporation, the earnings pass through to the shareholder for income recognition and the ESOP is not a taxpayer."
4. Mr. Jenkins on the tax benefit of selling to shareholders: "The financial benefits or incentives behind an ESOP transaction … depending on what state you're in, might be upward of 30 percent in tax savings. When you compare that to alternative sales, private equity or any other type of sale, you need to start to look at a transaction that's taxable, that must have premium of something in excess of about 25 to 30 percent in order for it to equal the value associated with an ESOP."
More articles on leadership and management:
How preparation, work ethic and trust defined Joe Montana's Super Bowl-winning career
Tri-State Surgery Center names Susan Gourley administrator — 4 insights
These are the money-makers: World's 10 biggest healthcare companies by revenue