Transcription
ESOP’s as an EffectivePlanning ToolPresented by:Roy A. FarmerManaging DirectorFor Internal Use Only. Not For Public Distribution
Business Transition Advisors, Inc. Providing services in all 50 states Drawing on 75 YEARS of combined team experienceIn the last 5 years BTA has worked with: Over 8,100 employees 455 stockholders Market values of over 1.75 BILLION DOLLARS!For Internal Use Only. Not For Public Distribution
Unique Features Since Congress believes that havingemployees accumulate retirement income isbeneficial to society, it provides 3 major taxincentives to ESOP’s:1. Stock sold to ESOPs can qualify to defer/avoid2.3.capital gains taxThe company can receive a dollar for dollardeduction for stock sold to the ESOPThe company can become State & FederalIncome tax freeFor Internal Use Only. Not For Public Distribution
Uses of ESOPs Business Owner Exit Strategy/NextGeneration TransferLiquidity/Diversification for Closely HeldStockPartner Buy OutDesire for Employee Owned CultureDivorces/Immediate Cash NeedsEnhanced Employee Benefits/HandcuffsMergers & AcquisitionsFor Internal Use Only. Not For Public Distribution
Traditional Option Concerns All traditional sale methods use after-tax dollarsESOP’s utilize pre-tax dollarsFor Internal Use Only. Not For Public Distribution
Traditional Option Concerns 10,000,000 Business ValueNon-ESOPESOP 16,666,000 Earnings Required 10,000,000 Earnings Required 6,666,000 Corporate Tax 10,000,000 Deduction 10,000,000 Net After Tax 4,000,000 Tax Savings* 2,920,000 Capital Gains Tax 7,080,000 Net to Seller10,000,000 Net to SellerTax Savings Over 10,000,000 Assuming 40% Combined Federal & State Tax RateAssuming 29.2% Avg. Combined Federal & State Capital Gains Tax RateFor Internal Use Only. Not For Public Distribution
How an ESOP Works:For Internal Use Only. Not For Public Distribution
How an ESOP Works:For Internal Use Only. Not For Public Distribution
How an ESOP Works:§For Internal Use Only. Not For Public Distribution
How an ESOP Works:For Internal Use Only. Not For Public Distribution
How an ESOP Works:For Internal Use Only. Not For Public Distribution
IRC § 1042 Tax Deferral Selling shareholder may elect to indefinitelydefer all capital gains on sale proceedsregardless of basisSimilar to real estate provision IRC § 1031and life insurance IRC § 1035Requirements set at a relatively “low bar”Financial products specifically made tofacilitate liquidity of IRC §1042 assetsFor Internal Use Only. Not For Public Distribution
100% “S” Corporation ESOP Pays no Federal or State corporate incometax to the extent ESOP owned Taxation is “passed through” toshareholders in proportion to ownership An ESOP is tax exempt, therefore no tax ispaid on percentage owned by the ESOP Corp does not have to distribute income Exempt from prohibited transaction rulesFor Internal Use Only. Not For Public Distribution
Taxation of “S” CorporationsBefore the ESOPThe CompanyCPA Prepares Form K-1K-1 Goes to the OwnerThe ShareholderFiles 1040Pays TaxFor Internal Use Only. Not For Public Distribution
Taxation of “S” CorporationsAfter 100% Sale to the ESOPThe CompanyCPA Prepares Form K-1K-1 Goes to the OwnerESOPThe ShareholderFiles 5500Pays No TaxFor Internal Use Only. Not For Public Distribution
Corporate GovernanceIF YOU CONTROLTHE BOARD OF DIRECTORSYOU CONTROL THE COMPANY Corporate control Shareholders Elect the Board of Directors Board of Directors appoints the Officers Officers responsible for day-to-day operationsFor Internal Use Only. Not For Public Distribution
ESOP Corporate Governance(Privately Held Company)In An ESOP Board of Directors appoints the ESOP Trustee The Trustee votes the stockFor Internal Use Only. Not For Public Distribution
How Do We Finance the Buy Out Financing an ESOP is normally done with acombination of bank debt and other debtor equity from outside partiesThe owner can take a note back for someor all of the stock sale amountFor Internal Use Only. Not For Public Distribution
Capital Structure: Need to Finance 100%For Internal Use Only. Not For Public Distribution
Capital Structure: Need to Finance 100%For Internal Use Only. Not For Public Distribution
Capital Structure: Need to Finance 100%For Internal Use Only. Not For Public Distribution
Capital StructureRecommended Structure The Seller is entitled to a Market Rate of InterestInstead of going to the market for all thefinancing, we recommend the seller take anote for everything above senior debtThe interest rate can be adjusted to suit thesellers goals and the company cash flowFor Internal Use Only. Not For Public Distribution
Capital Structure: Need to Finance 100%For Internal Use Only. Not For Public Distribution
Warrants to the Seller Since the Seller is willing to accept a lowerrate of interest on the seller note portion,warrants are issued to “make up” thedifference in the lower interest rate.This allows Warrants to be issued that canbe 25-35% of the total equity of thecompanyFor Internal Use Only. Not For Public Distribution
Warrants to the Seller The Warrants are then able to be exercisedonce all the debt (both Bank and Owner) ispaid offThe owner receives a 2nd bite of the appleIf the company grows and is successful, theWarrants can be extremely valuable to theownerFor Internal Use Only. Not For Public Distribution
Corporate FinanceWarrants Right to purchase company stock at afuture date at a fixed price Priced “post transaction” Must be valued by qualified valuator Gives the seller a “2nd bite of the apple” Warrants can be give to management orfamily members in the businessFor Internal Use Only. Not For Public Distribution
ESOP Candidate Profile Owner wishing to cash out all orportion of business Payroll of 1,000,000 or greater Strong succession management 5,000,000 or more business value 15 Employees Low cost basisFor Internal Use Only. Not For Public Distribution
Success StoriesIndustrial CoolingSoutheast 7 millionPayment ProcessingSouthwest 35 millionEnergy ResellerSouthwest 300 millionCivil EngineeringSouthwest 45 millionManufacturingCompanySouthwest 15 millionEngineeringConsultingSouthwest 20 millionPlastic MoldsIndustryNortheast 7 millionConcreteConstructionNorthwest 16 millionPharmaceuticalCompanySouthwest 125 millionDrilling CompanySouthwest 6 millionPet Food IndustrySoutheast 60 millionElectrical DesignSouthwest 18 millionCivil EngineeringSouthwest 6 millionShipping ReceivingNorthwest 10 millionMachine ToolManufacturerNortheast 6 millionAerospaceEngineeringNorthwest 14.5 millionWeapons ResearchSouthwest 4 millionPEO/Workers CompSouthwest 12 millionGrain & FlourProductsNorthwest 58 millionSteel FabricationNortheast 29 millionEngineeringServices Northwest 8 millionTelecommunicationIndustryNorthwest 40 millionFinancial ServicesSoutheast 14 millionFor Internal Use Only. Not For Public Distribution
Contact InformationRoy FarmerManaging DirectorEmailrfarmer@bta.us.comPhone(208) 761-3612For Internal Use Only. Not For Public Distribution
PEO/Workers Comp Southwest 12 million Grain & Flour Products Northwest 58 million Steel Fabrication Northeast 29 million Engineering Services Northwest 8 million Telecommunication Industry Northwest 40 million Financial Services Southeast 14 million
