From representing the trustee in the ESOP’s original acquisition of stock in 2017, through three years of subsequent valuation engagements, and ultimately advising the trustee in the successful sale of the Company to a strategic buyer in 2020, Acuity was there to help Arborwell through its ESOP journey, from start to finish.
Background and Relationship
Arborwell is a leading professional tree management firm, providing a broad range of arboricultural services to large property management companies, commercial developers, landscape architects, municipalities, and high-end residential builders along the West Coast.
Prior to late 2017, the Company was majority-owned by its founder, with the minority interest held by a small handful of key employees. After entertaining discussions with a buyout fund, the ownership group elected to pursue a sale of 100% of the Company to a to-be-formed ESOP. The acquisition was closed in the fourth quarter of 2017, and Acuity issued a fairness opinion in connection with the transaction.
Following the 2017 acquisition, Acuity remained on as the valuation advisor to the trustee, providing the requisite annual valuations of Company stock for ESOP administration purposes, as well as ongoing guidance in a number of special matters along the way. For example, in 2019, when the Company’s board of directors proposed a partial bank refinancing of subordinated seller notes issued in the original transaction, Acuity advised the trustee as to the implications of the refinance for the Company’s solvency and pro forma equity value, ultimately enabling the trustee and the board to prudently approve and execute the refinancing transaction.
In 2020, amidst the volatile business environment brought on by the COVID-19 pandemic, Arborwell was approached by a strategic buyer with a preliminary offer to acquire the Company’s stock from the ESOP. Following the board’s decision to retain an investment banker to further explore the opportunity, the trustee turned to Acuity for guidance.
Goals and Challenges
Apart from the headline enterprise valuation, which was certainly compelling, there were several material considerations that were vital to the preservation of the ESOP’s economic interests. Significant leverage remained in place from the original ESOP transaction, along with warrants issued to provide incremental return to the subordinated creditors. These warrants, together with stock appreciation rights issued to key executives (SARs), posed a dilutive risk to the ESOP’s participation in the transaction proceeds.
Given the timing of the potential sale, not only were the Company’s financial projections undergoing frequent revision, but significant questions and complexity lingered from the Company’s PPP loan, which remained outstanding throughout the diligence process. The regulatory framework surrounding the PPP loan program was fluid and largely unpredictable, and gave rise to potential tax and valuation consequences that could change with little notice.
The buyer, a large tree care provider on the East Coast, was a majority-owned platform company of a larger private equity fund, and completed over a dozen add-on acquisitions in the preceding three years, but had never acquired an ESOP-owned target. While deep financial sophistication and specialized external resources would be brought to bear on the diligence process, significant effort would be necessary to help the buyer gain comfort with vital ESOP-related issues.
To address the obstacles presented by the warrants and SARs, we prepared and presented a detailed scenario analysis to the trustee, outlining the sensitivity of potential outcomes for the ESOP to a number of highly dynamic and inter-related assumptions. Armed with this insight, the trustee, together with Acuity and counsel, proactively negotiated a provision whereby the dilution to the ESOP from these instruments was meaningfully reduced, preserving a significant majority of the transaction proceeds for the ESOP participants.
What’s more, the Company’s investment banker and the buyer jointly sought Acuity’s assistance in understanding and modeling the allocation of proceeds across the various stakeholders, using the internally developed framework promulgated by our analysis. Given the many competing interests between the Company, its management team, its subordinated creditors, the buyer, and the ESOP, this aspect of the transaction process was crucial to getting across the finish line.
After just under four months of negotiation and in-depth due diligence, we issued our fairness opinion, and the transaction was successfully closed.
The ESOP was able to exit its investment at a significant premium over the appraised fair market value of the shares, while simultaneously providing immediate liquidity for the subordinated creditors and synthetic equity holders.
By negotiating meaningful protections with the Company’s management and subordinated creditors, we successfully lowered the dilutive impact of the warrants and management incentive units by nearly two-thirds. What’s more, our bespoke analytical framework was instrumental in fostering alignment between the Company and the buyer, and was ultimately so integral to the transaction that it was nested in the buyer’s final flow of funds.
The sale of a relatively young ESOP company carries a number of attendant complications, and protecting the trustee and ESOP participants through a fast-paced transaction process requires a knowledgeable and nuanced advisor with extensive experience in resolving ESOP-specific issues. Through initiative, foresight and collaboration, Acuity Advisors helped Arborwell’s employee-owners achieve the right result.