Essential Training & Education for the Trucking Industry. ESOPs in Trucking: A Strategy for Succession Planning and Successful Ownership Transi<on

Transcription

1 Essential Training & Education for the Trucking Industry ESOPs in Trucking: A Strategy for Succession Planning and Successful Ownership Transi<on

2 TCA Polling Question Please let us know how many participants are viewing this program at your location.

3 Essential Training & Education for the Trucking Industry ESOPs in Trucking: A Strategy for Succession Planning and Successful Ownership Transi<on

4 Sponsored by: 2015 Truckload Carriers Association, Inc. All rights reserved.

5 ButcherJoseph & Co. Our team has been trusted advisors to middle market companies for the past 15+ years Structured and closed over 200 transactions exceeding $15B in total value Over $500MM raised in senior and subordinated debt markets in 2015 Member of the ESOP Association, National Center for Employee Ownership, ESOP Centre, Truckload Carrier Association, Associated Equipment Distributors

6 Thomas Stephens Executive Vice President, Paschall Truck Lines, Inc. 45+ years of trucking industry experience including dry van, tank, refrigerated, auto, flatbed and heavy haul carriers Associated with Paschall Truck Lines for over 19 years

7 Succession Planning for Trucking Companies

8 Polling Question #1 Are you considering a transaction in the next 18 months? Yes No Unsure

9 Succession Planning for Trucking Companies As owners review succession planning alternatives, they have several choices Sell to a strategic buyer Sell to a financial buyer Sell to the employees through an Employee Stock Ownership Plan ( ESOP ) Do nothing Generally not an acceptable alternative

10 Potential Buyers for Trucking Companies Strategic buyer Generally a competitor May offer highest price on the surface due to synergies Risk of relatively immediate job loss May not continue seller s legacy Integration risk following closing Financing is less of an issue, particularly with a publicly traded buyer

11 Potential Buyers for Trucking Companies (cont.) Financial buyer Generally a private equity firm Three to seven year investment horizon, company will then be sold again with risk of job and legacy loss Price will generally be lower than the price paid by a strategic buyer Little integration risk following closing Financing is less of an issue, depending upon size of equity investment

12 Potential Buyers for Trucking Companies (cont.) ESOP Seller and management control their own destiny May pay price similar to a financial buyer; can pay Fair Market Value ( FMV ); after-tax proceeds can be greater than alternatives due to tax benefits Preserves employee jobs and company legacy No integration risk following closing Financing may be more of an issue, due to need for capital investment with respect to the fleet Financing gap generally filled with seller financing

13 Potential Buyers for Trucking Companies (cont.) ESOP continued Seller may receive warrants (equity upside) for 25-30% of the company as part of the seller financing structure Management team may receive equity upside in the form of warrants, stock appreciation rights ( SARS ), phantom stock or other equity derivatives to align their interests with those of the plan participants

14 Q&A

15 Polling Question #2 Please select your level of familiarity with ESOPs. Not at all familiar with ESOPs Slightly familiar, heard the term ESOP before General understanding of ESOPs Very familiar, strong understanding

16 Employee Stock Ownership Plans (ESOPs)

17 Employee Stock Ownership Plan (ESOP) Basics ESOPs are employee benefit plans that serve as a buyer for all or part of a business Transactions are generally structured as shown below:

18 Employee Stock Ownership Plan (ESOP) Basics (cont.) FMV is determined through negotiation with trustee and its financial advisor, who represent interests of employee participants in the plan Company borrows money from bank, other lender or seller to finance the transaction ( outside loan ) ESOP borrows money from the company ( inside loan ) to finance the purchase from the selling shareholder(s)

19 Employee Stock Ownership Plan (ESOP) Basics (cont.) Inside loan is repaid through tax-deductible contributions to the ESOP by the company Amortization on the outside and inside loans varies; inside loan typically takes years Financing gap between what outside lenders are willing to provide and the purchase price is filled with junior capital or seller financing Borrowing needs for fleet replacement should be included in the calculation of third party debt availability

20 Tax Advantages Associated with Sale to an ESOP

21 Tax Advantages Associated with Sale to an ESOP (cont.) Tax benefits for seller(s) Federal and, in most cases, state capital gains tax deferral (potentially elimination) for the seller Seller must reinvest proceeds in Qualified Replacement Property ( QRP ) to defer capital gains taxes QRP consists of debt or equity in US domiciled operating company If QRP is held until seller s death, assets pass on to heirs on a stepped up basis; no capital gains tax is paid

22 Tax Advantages Associated with Sale to an ESOP (cont.) Tax advantages associated with ESOP sale Create Federal and, in most cases, state taxexempt entity going forward using this structure The ESOP trust is a tax exempt entity When it owns 100% of the stock of an ESOP company, the business itself becomes tax-exempt due to the passthrough nature of the S-Corp structure Converting from C-Corp to S-Corp status may eliminate any deferred tax liability on the balance sheet over time Please consult your tax advisor for details

23 Q&A

24 Parties Involved in the Transaction Financial advisor Retained by the company Responsible for structuring transaction, raising capital and managing the transaction to closing Assembles the transaction team in cooperation with the business owner and company management Generally paid on a success fee basis, with upfront retainer offset against the success fee

25 Parties Involved in the Transaction (cont.) Trustee Retained by the company Responsible for making decision to purchase stock on behalf of the ESOP employee participants Must ensure that the purchase price is no greater than FMV Assisted in the decision by a financial advisor that values the company s stock to ensure that the value paid is fair Generally paid on a flat fee basis, often with an upfront retainer. The trustee s financial advisor is generally retained on the same basis.

26 Parties Involved in the Transaction (cont.) Lender(s) Provides financing for transaction Generally bank or non-bank lender May include junior capital provider or seller financing to cover gap remaining after senior lender Generally selected through a competitive process Fees may include upfront commitment fee and syndication or structuring fee Fees and expenses are paid by the company at closing

27 Parties Involved in the Transaction (cont.) Attorneys Attorneys involved in the transaction will generally include: Company counsel; may have ESOP transaction counsel as well, depending upon company outside counsel experience with ESOPs Counsel to the selling shareholder(s) Trustee counsel Bank or lender counsel Generally paid on an hourly or flat fee basis at closing

28 Polling Question #3 ESOP transactions take 2-3 years to complete. True False

29 Timeline and Steps in the Process ESOP transaction can generally close within three to four months Financing process generally takes biggest portion of time May take six to eight weeks to complete selection process Trustee, trustee financial advisor and attorneys are generally engaged after capital is soft circled and preliminary structure completed Trustee s due diligence and valuation work begins; initial drafts of transaction documents are prepared

30 Timeline and Steps in the Process (cont.) Final negotiation on structure and value Transaction documentation in process along with due diligence, valuation and structure negotiation Simultaneous negotiation and preparation of financing documents Transaction closes after all negotiation and documentation is complete Key is full engagement and focus on part of all parties to the transaction

31 Q&A

32 Sponsored by: 2015 Truckload Carriers Association, Inc. All rights reserved.

33 Brought to you by the: 2015 Truckload Carriers Association, Inc. All rights reserved.