Checklist for the Sale of Stock - PowerPoint by gps13265


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									      Using ESOPs to
Facilitate a Third Party Sale

          Ronald J. Gilbert
         ESOP Services, Inc.

         Paige A. Ryan, MIB
         ESOP Services, Inc.

 Overview
 The Exit Planner’s Role
 Pros and Cons
 Case Studies and the basics of
    The Non-Leveraged ESOP
    The Leveraged ESOP
 Creating an ESOP
 Candidate Check List

                        Helping Your Clients
                       Meet Their Objectives
What if a business owner could…
 – Sell some or all shares at Fair Market Value
 – Pay no capital gains tax when they sell
 – Preserve company legacy and independence
 – Reward employees
 – Position company to avoid paying additional federal
   income taxes
 – Work as much as they desire after the sale

                 Integrate with the Exit Plan
• Step 1 - Identify Owner Objectives
• Step 2 - Quantify Business and Personal Financial Resources
• Step 3 - Maximizing and Protecting Business Value
• Step 4 - Ownership Transfers to Third Parties
• Step 5 - Ownership Transfers to Insiders
• Step 6 - Business Continuity
• Step 7 - Personal Wealth and Estate Planning

                                            Why ESOPs?
• Answers the question, “What are my alternatives for
  business perpetuation and creating liquidity?”
   –   Sale to Third Party
   –   Merger
   –   Sale to Management
   –   Corporate Stock Redemption
   –   Initial Public Offering
   –   Gift or Other Transfer to Heirs
   –   Wind-Up Business and Liquidate
   –   Leveraged Recapitalization
   – Sale to Employee Stock Ownership Trust (potentially tax deferred
     with tax-free income)
• Creates liquidity, in part or whole, enabling the
  business owner(s) to diversify their portfolios
• Maintain Advisor Relationships (often not the case
  in a merger or sale of the company)
• 30 year history of success!
• 11,500 ESOPs in U.S. covering 10,000,000
• Less than 3% of ESOPS are in publicly traded
  companies, more than 97% in privately
• 70% of ESOP’s are in companies with fewer than
  250 employees
• 75% of ESOP companies are or were leveraged
• Over 4000 are majority owned by the ESOP
• Found in a broad range of industries
    (Source: The ESOP Association)

                           What is an ESOP?

An ESOP is a Tax Qualified Defined Contribution
Plan (ERISA)
  – Invests primarily in the stock of the sponsoring
  – “Qualified” in that sponsoring company, selling
    shareholder(s), and employees receive various tax
  – Technique of corporate finance
  – May use debt to purchase employer securities

                                Tax Incentives
                                        Approx. Savings
IRC 1042 “Tax-free” Shareholder Liquidity     20%+ -

Tax-Deductible Principal                     40% + -

Tax Free S Corporation Income                20% + -

Potential Tax Savings                    40% - 100%

                                    Advantages (Pros)
Company               Stockholders           Employees
• Substantial tax     • Liquidity in part or • Share in equity
 savings (40% -           whole               growth
 100%)                 • 1042 Rollover     • Research shows
• Increased cash flow • Control may be      ESOP companies
• Pre-tax dollars repay maintained in most more likely to have
 debt                     instances (if       other retirement-
• Income of S Corp        desired)            oriented benefit plans
 ESOP stockholder                            • Proven motivator
 not subject to federal                      • Retains key EES
 income tax

                   Disadvantages (Cons)

• Requires debt to purchase a block of stock
  – Can be unleveraged for smaller purchase
• Repurchase Obligation
  – Planning for funding options essential
• Complexity
  – Experienced advisors essential
• Potential pass through voting

                         Exit Planner’s Role
Identify Clients with:
• History of good cash flows
• Stock is privately held
• Shareholder interest in liquidity/diversification
• Shareholder interest in maintaining legacy of
  business and employee continuity
• Solid successor management team with
  interest in stock
• Small or middle market company with pre-
  tax, pre-distribution bonus earnings of $1M +
                Begin with the end in mind
• Identify objectives
   –   Seller(s) / Shareholder(s)
   –   Company
   –   Employee benefit levels
   –   Ownership culture
• Identify key issues and plan accordingly
   –   Capital structure, post deal and future
   –   Financing with focus on cash flow, tax savings
   –   Repurchase Obligation
   –   Culture
                            Exit Planner’s Role
• Are you interested in using “tax-free” and/or tax
  deductible dollars to provide shareholder liquidity?
• Is your objective a gradual or immediate exit strategy
  (ESOPs provide for both)?
• Do you know any local companies in your industry
  who have used an ESOP for shareholder liquidity
  and/or business perpetuation?
• Have you ever considered an ESOP?

RECOMMEND … A preliminary cash flow and tax
  savings analysis (no cost)

   Case Study No. 1
Non-leveraged ESOP
  Software Company

(1) Company sets up an ESOP Trust
(2) Company makes annual tax deductible
    contributions in cash or stock to the      Shareholders
    ESOP.                                                         Company
(3) Cash is used to buy stock from current
(4) Shares are allocated to the accounts of            3
    eligible employees with in the ESOP
    based on salary
(4) ESOP holds stock for employees and
    annually notifies them of how much                     ESOP (1)
    they own and how much the stock is
(4) Employees collect: stock or cash,
    according to a vesting schedule when
    they retire or otherwise leave the

                          Software Company
• Objectives
  – Create liquidity for existing owners
  – Create majority position for current 30%
• Key issues
  – Stock Purchase by outside shareholder with debt,
    then selling annually to the ESOP to cover
    amortization, with goal of retaining 51%
  – Repurchase Obligation
  – Involve all employees in ownership

                          Leveraged ESOPs

• The ESOP receives a loan and uses the
  proceeds to purchase stock from current
  – These shares are held in trust and are released into
    employee accounts at a rate corresponding to debt
  – ESOP may borrow from the company, a bank,
    selling shareholders, or a combination

                          Bank Leveraged ESOP
                    (ESOP Purchases Stock from Shareholders)
                                         ESOP               Stock or Cash

                                     4                                      Employees
Lender                                    2     Stock
                                         Note           3
          Note                                              Cash
            1                    2

                                                                               UP-FRONT FLOWS
                 Company                                                        FUTURE FLOWS

   (1) Bank lends to company
   (2) Company lends to ESOP
   (3) ESOP buys stock from existing shareholders
   (4) Company makes annual tax-deductible contributions to ESOP, which in
          turn repays lender
   (5) Employees receive stock or cash when they retire or leave the company
          (vesting applies)
                   Financing Alternatives

1.   Bank
2.   Private Equity Group
3.   Selling Shareholder
4.   The Company
5.   Management investment (not-typical)
6.   Broad-based employee investment (rare)

                Case Study No. 2
C Corp, Minority ESOP, Non- 1042
              Specialty Contractor

                       Specialty Contractor

• Objectives
  – Liquidity for husband/wife, 50/50 shareholders, to
    diversify assets
  – Begin transfer of ownership to next generation,
    which includes family
  – Create cash flow taxed at capital gains
• Key Issues
  – Company requires bonding
  – Transitory employee base
  – Prevailing wage requirements
           Case Study No. 3
C- Corp, Majority ESOP, 1042

                   Case Study: Consulting
• Objectives
  – Liquidity for current shareholder and perpetuate
    business with 51% ESOP
  – Continue transfer of remaining shares to
• Key Issues
  – Extensive options created issues upon exercise
    related to ESOP’s majority position
  – Educating existing bank to obtain financing

               Case Study No. 4
Manufacturing Firm – 100% ESOP

            Case Study: Manufacturing

• Objectives
  – Perpetuate the company by transitioning
    ownership from 61 owners (all employees close to
    retirement) to the current employee base of 300
  – Responsibly finance perpetuation plan
  – Provide fair value to all current shareholders
  – Enable the continuation of the existing business
    with minimal disruption
  – Perpetuate a historically successful ownership
    culture by involving all employees as owners
             Case Study: Manufacturing

• Key Issues
  – Getting to 100% with 60+ shareholders.
  – Structuring for 1042 then convert to 100% S Corp
  – Financing 100% with bank loan and seller notes
    and cash for operations and growth
     • Corporate tax savings generated by S Corp ESOP permit
       rapid debt repayment
  – Communicating with 10+ locations

                               Creating an ESOP
•   Preliminary Analysis of Cash Flow and Tax Savings
•   Phase I
    – Preliminary Valuation
    – Feasibility Study (“Decision Package”)
•   Phase II ~ Implementation
    –   Plan design
    –   Financing
    –   Employee communications
    –   Repurchase obligation planning/funding
    –   Independent transaction valuation
•   Phase III ~ Ongoing
    – Annual valuation
    – Record keeping
    – Communications
               Is an ESOP Right for Your Client?
               ESOP Candidate Checklist
___/___1. The entity is a corporation taxed in the normal manner.
          Please check type of corporation.
          "C" Corp. ___ "S" Corp. ___ Professional Corp. ___

___/___2. The company is closely held, or if publicly traded has a
          significant concentration of ownership

___/___3. The company has payroll adequate to support an ESOP
          (Minimum $1,000,000)

___/___4. The company has a strong pretax, pre-distribution/bonus
          earnings and cash flow over the previous few years
          ($1,000,000 +)
                  Is an ESOP Right for Your Client?
                  ESOP Candidate Checklist (Continued)

Yes No
___/___5.   The company expects to have strong pretax, pre-
             distribution/bonus earnings over the next few years

___/___6.   The company has paid substantial federal income taxes
             during the past few years

___/___7. At  least some stockholders are motivated to sell some
             stock; e.g., planning for retirement, liquidating an estate,
             entering a new business venture, children not involved in
             business, etc.

                 Is an ESOP Right for You?
                 ESOP Candidate Checklist (Continued)
Yes No
___/___8. If one or more principal executives will be departing in
         connection with the sale, there is strong management
         available to take their place(s)

___/___9. The company customarily makes payments to a 401(k)
         or profit sharing or other employee benefit plan that could
         in the future be made to an ESOP

___/___10.The owners are psychologically willing to share
         ownership with their employees, assuming an attractive
         transaction can be arranged

 Ronald J. Gilbert
ESOP Services, Inc.

Paige A. Ryan, MIB
ESOP Services, Inc.
                        ESOP Services, Inc.

Founded in 1984, ESOP Services, Inc. responds to the needs of business owners
to understand and analyze the ESOP’s impact on the company, shareholders,
and employees, focusing on the financial aspects of cash flow, tax savings,
shareholder liquidity, and employee benefits.

We specialize in all aspects of Employee Stock Ownership Plans for both private
and public companies throughout the United States and internationally. Our
unique approach emphasizes the financial aspects of ESOPs, while coordinating
the many diverse elements necessary to successfully establish an ESOP.

Paige Ryan                                  Ron Gilbert
San Diego, CA 92142                         Scottsville, VA 24590
Phone: 858.292.4819                         Phone: 434.286.3130            

Circular 230 notice

To ensure compliance with requirements imposed by the IRS, we inform
you that an U.S. federal tax advice contained in this communication is not
intended or written to be used, and cannot be used, for purpose of (i)
avoiding penalties under the Internal Revenue Code or (ii) promoting,
marketing or recommendations to another party any transaction or matter
addressed within.


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