Employee Stock Ownership Plans (ESOPs): Latest Trends and Developments in the 2017 Landscape

Transcription

1 Butterfield Schechter LLP Marc S. Schechter Partner The ESOP Group UBS Financial Services Inc. Ke it h A. Me ricka Man agin g Dire ctor - We alth Management, Private Wealth Advisor, Senior Portfolio Manager Employee Stock Ownership Plans (ESOPs): PCE Investment Bankers, Inc. David Jasmund Shareholder, Investment Banking BTA, Inc. Daniel M. Zugell, CLU, ChFC, LUTCF Director/Senior Vice President Thank you for logging into today s event. Please note we are in standby mode. All Microphones will be muted until the event starts. We will be back with speaker 02:55pm. Any Questions? Please info@theknowledegroup.org Gr oup Registration Policy Please note ALL participants must be registered or they will not be able to access the event. If you have more than one person from your company attending, you must fill out the group registration form. We reserve the right to disconnect any unauthorized users from this event and to deny violators admission to future events. To obtain a group registration please send a note to info@theknowledgegroup.org or call

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6 6 Employee Stock Ownership Plans (ESOPs): Butterfield Schechter LLP is San Diego County's largest firm focusing its law practice primarily on employee benefit plan matters. Butterfield Schechter LLP was founded in 1998 by Robert K. Butterfield and Marc S. Schechter. The attorneys at Butterfield Schechter LLP are dedicated to providing top-quality legal service tailored to clients' needs. Our commitment to excellent service and our combined experience fosters positive and efficient solutions for clients. The firm's persistent effort to prevent legal problems from occurring encourages the development of long-term client relationships. Our broad-based clientele includes corporations, individuals, partnerships, limited liability companies, joint ventures, qualified retirement plans, nonprofit organizations, and government agencies. While many of our clients initially come to us for our ESOP insight and execution, we view that transaction as part of the larger scope of your wealth management strategy. Our experienced team is well-versed in addressing the complex wealth advisory and planning challenges affluent investors face. With deep expertise and resources for addressing complex wealth challenges, UBS Private Wealth Management and The ESOP Group offer perspective and insights into what affluent clients need and expect industryleading innovation, global solutions and an exceptional

7 7 Employee Stock Ownership Plans (ESOPs): The professionals at PCE have the expertise to structure ESOP transactions, negotiate value and raise the necessary capital to complete the deal while always keeping the client s specific goals as the priority. Having installed and designed ESOPs for companies around the country, PCE can help business owners determine whether employee ownership is right for their business. We have completed more than $2 billion of ESOP transactions for privately held companies, so we also understand how, when and why to sell any size company to an ESOP. Our experienced team provides middle-market business owners with award-winning investment banking, ESOP, valuation, and advisory services. Since 1997, PCE has offered middle market clients the sophistication of a full-service firm with the individualized attention of a boutique firm. Business Transition Advisors specializes in ESOP consultation and analysis including feasibility studies, implementation, financing, employee communications and more. Our holistic approach reaches beyond basic installation of an ESOP and takes into account the total needs and consequences for the seller, company, management, and employees. Our collective experience with hundreds of clients offers a unique perspective to address business owner liquidity using the most advanced and creative techniques available, while incorporating the brightest ESOP professionals in their respective fields.

8 Butterfield Schechter LLP Marc S. Schechter Partner The ESOP Group UBS Financial Services Inc. Keith A. Mericka Managing Director - Wealth Management, Private Wealth Advisor, Senior Portfolio Manager Marc Schechter specializes in the areas of employee benefits, ERISA, and business matters. He has extensive experience designing, drafting, and implementing all types of employee benefit programs, with emphasis on ESOP transactions. In addition to handling a wide range of business transactional matters, he has significant experience with ERISA litigation matters and representing plan sponsors in audits with the IRS, FTB, and DOL relating to qualified and nonqualified employee benefit plans. He is an active speaker on employee benefit law topics for a wide variety of organizations. His client base ranges from sole practitioner lawyers and physicians to publicly traded corporations to professional musicians and athletes. Keith and his team have advised hundreds of private and family business owners through a process designed to optimize pre- and posttransaction outcomes, most often involving a taxadvantaged ESOP sale. Keith joined UBS in 1987 after starting his career with Morgan Stanley in Soon after joining UBS, Keith co-founded UBS s national Employee Stock Ownership Plan (ESOP) practice. For many years he has been an active and frequent speaker on a variety of ESOPrelated subjects and is universally regarded as a thought leader and the foremost expert of ESOP section 1042 tax-deferred sales and ESOP cash and investment management. 8

9 PCE Investment Bankers, Inc. David Jasmund Shareholder, Investment Banking BTA, Inc. Daniel M. Zugell, CLU, ChFC, LUTCF Director/Senior Vice President David Jasmund is a founding partner of PCE, and a member of PCE s ESOP and Investment Banking groups. With nearly 40 years of business experience, David has a unique business perspective as highly successful entrepreneur, business owner and advisor. Prior to his work at PCE, he grew a small insurance start-up of three people into a powerhouse that employed more than 1,200 people and generated annualized revenues of over $700 million Considered an expert within the ESOP community, David provides tremendous insight into the benefits associated with ESOPs. David has the analytical and organizational skills to guide business owners through the most complex ESOP structures from feasibility to installation. Daniel M. Zugell, CLU, ChFC, LUTCF is Director/Senior Vice President of BTA, Inc. with a wealth of hands-on and management experience spanning many financial service disciplines. Dan s experience includes the formation of MetLife s ESOP program and as a Director of MetLife s Institutional Specialized Benefit Resources division. Since 1998, Dan has emerged as a national presence on ESOP matters as a frequently published author and featured speaker. Dan holds a B.A from Grove City College, has earned several advanced financial designations and is a member of The ESOP Association, National Center for Employee Ownership, The Estate Planning Council and the Society of Financial Service Professionals. Ambassador - Pennsylvania Center for Employee Ownership. 9

10 10 An employee stock ownership plan (ESOP) is a qualified defined-contribution retirement plan in which the company contributes its stock or acquires shares from existing shareholders, for the benefit of the company's employees. Under the Internal Revenue Code of 1986, stock sales to an ESOP may qualify the seller to the ESOP for a tax-favored treatment. In this LIVE Webcast, a seasoned panel of experienced ESOP consultants and professionals brought together by The Knowledge Group will provide the audience an in-depth overview of the fundamental framework of Employee Stock Ownership Plans. Speakers will highlight the recent trends and developments with regard to this remarkable topic. Speakers will also discuss cases involving ESOP companies. Key topics include: Employee Stock Ownership Plans (ESOPs): Employee Stock Ownership Plans - Framework Opportunities and Risks Myths and Misconceptions Related to ESOPs Current Regulatory Environment of ESOPs Recent Trends and Developments

11 Marc S. Schecht er Partner Butterfield Schechter LLP Keit h A. Mericka Man agin g Dire ctor - Wealth Management, Private We alth Ad visor, Se n ior Portfolio Man age r The ESOP Group UBS Financial Services Inc. David Jasmund Shareholder, Investment Banking PCE Investment Bankers, Inc. Daniel M. Zugell, CLU, Ch FC, LUTCF Director/Senior Vice President BTA, Inc. For more information about the speakers, you can visit: 11

12 Introduction Marc Schechter specializes in the areas of employee benefits, ERISA, and business matters. He has extensive experience designing, drafting, and implementing all types of employee benefit programs, with emphasis on ESOP transactions. In addition to handling a wide range of business transactional matters, he has significant experience with ERISA litigation matters and representing plan sponsors in audits with the IRS, FTB, and DOL relating to qualified and nonqualified employee benefit plans. He is an active speaker on employee benefit law topics for a wide variety of organizations. His client base ranges from sole practitioner lawyers and physicians to publicly traded corporations to professional musicians and athletes. Marc S. Schecht er Partner Butterfield Schechter LLP 12

13 Marc S. Schecht er Partner Butterfield Schechter LLP 13

14 BENEFITS TO EMPLOYEES 1. Employees are not taxed on amounts contributed to the ESOP nor on earnings of the ESOP until they actually receive distributions (except for dividends distributed); 2. Distributions solely in the form of employer securities are not subject to the 20% mandatory withholding rules; 3. An ESOP can provide employees with a significant retirement income primarily through appreciation on employer stock; 4. An employee can share in the success of his employer by virtue of his stock ownership through ESOP participation; Marc S. Schecht er Partner Butterfield Schechter LLP 5. If the participant receives a "lump sum payment" which includes employer stock, the stock value increase from date of allocation to participant's account can be deferred upon distribution. 14

15 BENEFITS TO SHAREHOLDERS 1. An ESOP can create a ready current market for the stock of a major shareholder and thus provide liquidity not otherwise available; 2. Tax deductible funds available for payments through the ESOP made from: a. annual contributions; or b. loans made by the ESOP and usually guaranteed by the corporation. Marc S. Schecht er Partner Butterfield Schechter LLP 3. An ESOP can provide a future market for stock held by the estate of a deceased shareholder; 4. Life insurance on key man shareholders can be made tax deductible by having the ESOP buy and hold the policy to provide liquidity for the future purchase of stock; 15

16 BENEFITS TO SHAREHOLDERS (CONT D) 5. Capital gain treatment (now generally at 20% for federal taxes) is made available even though the purchase price comes from corporate contributions or corporate guaranteed loans; 6. Leveraging feature of ESOPs can make stock much easier to buy; 7. A selling shareholder can get cash and avoid risk of carrying much of the purchase price in a note. Marc S. Schecht er Partner Butterfield Schechter LLP 16

17 BENEFITS TO EMPLOYERS 1. Employer contributions to an ESOP, whether in stock or cash, are tax deductible by the employer; 2. Merely issuing a stock certificate can provide needed tax deductions! 3. If the company decides to pay dividends, the dividends paid to the ESOP are tax deductible to the corporation: a. If the dividend is actually distributed to ESOP participants within 90 days following the end of the plan year; or b. If the dividend is used to help repay a loan made to the ESOP. Marc S. Schecht er Partner Butterfield Schechter LLP An ESOP can provide an incentive for key employees to remain with the company by providing them with indirect stock ownership; 5. Well designed and communicated plans can have a great effect on employee morale and produce increased effort to provide a greater profit for all;

18 BENEFITS TO EMPLOYERS (CONT D) 6. Acquisitions of other businesses can be made on a pre tax basis; 7. Perhaps the biggest benefit an ESOP can offer a corporation is the ability to provide a method for financing and increasing working capital with pre tax dollars used to repay the loans supplied to the ESOP by outside lenders. Marc S. Schecht er Partner Butterfield Schechter LLP 18

19 TOP 10 TAX INCENTIVES FOR ESOPs Marc S. Schecht er Partner Butterfield Schechter LLP 1. The company s contributions to an ESOP are tax-deductible (within applicable limits) and tax-free to ESOP participants until they receive their distribution. 2. The income of an ESOP trust fund is exempt from federal and state income tax (except to the extent Unrelated Business Income Tax shall apply to the trust). 3. Special IRA rollover provisions and special tax treatment of appreciated company stock with ESOPs can defer the tax on distributions from ESOPs to employee-beneficiaries or, in certain circumstances, permit gains from distributions in the form of company stock to be taxed as long-term capital gains. 4. You may sell stock of your closely held subchapter C corporation to an ESOP on a tax-deferred (potentially income tax-free basis), if (a) the ESOP owns at least 30 percent of your company s stock immediately after the sale, and (b) you reinvest the sales proceeds in securities of other domestic operating corporations. 19

20 TOP 10 TAX INCENTIVES FOR ESOPs (cont d) Marc S. Schecht er Partner Butterfield Schechter LLP Purchase of a company can be leveraged through use of ESOP borrowed funds to purchase the target company s stock. 6. If your company uses an ESOP to obtain a loan, the company is entitled to income tax deductions for both loan interest and principal payments, instead of on interest payments only (as in an ordinary corporate loan). 7. Interest rates on loans to ESOPs sometimes are less than rates for other commercial loans. 8. Cash dividends on shares held by an ESOP of a C corporation are deductible if passed along to ESOP participants--or if used to pay off a loan used to finance the purchase of company stock. 9. Premiums for key-person insurance owned by the ESOP are fully deductible. 10. Cashless deductions are available through contribution of the company s own stock to the ESOP, freeing up dollars for other company needs.

21 ADVISORS & SUCCESSFUL ESOP IMPLEMENTATION ERISA Attorney Independent Valuation Consultant Third Party Administrator ESOP Trustee Financial Institution (if outside financing used) Marc S. Schecht er Partner Butterfield Schechter LLP 21

22 WHY TIME IS RIGHT FOR ESOP CONSIDERATION Marc S. Schecht er Partner Butterfield Schechter LLP 22 Demographics (aging baby boomers) Valuations (post-financial crisis recovery) Taxes (rates up, so deferral more attractive) Balance sought by owners of private companies (many key employees want to share in the value of company growth) Funding (financial markets available) Shareholder looking for liquidity option to outright sale of entire corporation to a third party

23 Introduction Keith and his team have advised hundreds of private and family business owners through a process designed to optimize pre- and post-transaction outcomes, most often involving a tax-advantaged ESOP sale. Keith joined UBS in 1987 after starting his career with Morgan Stanley in Soon after joining UBS, Keith co-founded UBS s national Employee Stock Ownership Plan (ESOP) practice. For many years he has been an active and frequent speaker on a variety of ESOP-related subjects and is universally regarded as a thought leader and the foremost expert of ESOP section 1042 tax-deferred sales and ESOP cash and investment management. Keit h A. Mericka Managing Director - Wealth Management, Private Wealth Advisor, Senior Portfolio Manager The ESOP Group UBS Financial Services Inc. 23

24 What if a business owner could...? ESOPs, when structured properly, provide a number of compelling benefits Ability to sell part or all of their company stock at Fair Market Value particularly if releasing confidential information to prospective buyers might have significant adverse impact on the business Minimize capital gains tax when they sell Continue to lead their company even after selling Preserve their company legacy and independence Reward employees & management Work as much or as little as they want after the sale Increase employee incentives and ultimately productivity Keit h A. Mericka Man agin g Dire ctor - We alth Management, Private Wealth Advisor, Senior Portfolio Manager The ESOP Group UBS Financial Services Inc. Position their company to become a 100% ESOP S- Corporation and potentially not pay federal or, in many states, state income taxes 24

25 Typical ESOP structure An ESOP is essentially an LBO that conveys several tax benefits to the company and its owners. Company creates ESOP and borrows funds from Lender Company re-lends proceeds to ESOP (Inside Loan) Leveraged ESOP Lender Loan Company Inside Loan Keit h A. Mericka Man agin g Dire ctor - We alth Management, Private Wealth Advisor, Senior Portfolio Manager The ESOP Group UBS Financial Services Inc. 25 ESOP uses funds to purchase shares of existing shareholders. Company services new debt by: Making tax deductible contributions to ESOP ESOP repays the Inside Loan to Company Company repays the lender As the Inside Loan is repaid, shares held as collateral for the Inside Loan are released and allocated to the employee accounts. Repayment Lender Inside Loan Repayment & Share Release Loan Repayment ESOP Company Stock Cash Contributions & Dividends Existing Shareholders QRP

26 What is Qualified replacement property (QRP) Keit h A. Mericka Man agin g Dire ctor - We alth Management, Private Wealth Advisor, Senior Portfolio Manager The ESOP Group UBS Financial Services Inc. Congress' intention is to incentivize owners of private companies who sell to an ESOP to reinvest into corporate America. Under IRC Section 1042, an owner of a non-publicly traded C Corporation can defer capital gains taxation on stock he or she sells to an ESOP if the seller reinvests ( rolls over ) the sale proceeds into qualified replacement property. If the qualified replacement property is held until death of the selling shareholder, the property transfers to heirs with a stepped-up cost basis. Eligible QRP Stocks Bonds Convertible Bonds Corporate Fixed Rate Bonds Corporate Floating Rate Notes ("FRNs") More than 50% of its assets used in the active conduct of a trade or business at the time QRP is purchased or before the close of the 15-month replacement period. No more than 25% of its gross income from passive sources for the taxable year preceding the taxable year in which such security was purchased. Not Eligible Municipal Bonds Exchange Traded Funds (ETFs) U.S. Government Bonds Mutual Funds Foreign Securities REITs Bank CDs Master Limited Partnerships (MLPs) 26

27 Overview of Important tax attributes There are many important aspects to consider when considering the sale of a business. It is important to work with experienced professionals. Deferral and possible elimination of Capital Gains Tax ~ IRC 1042 Deductibility of principal & interest ~ IRC 1361 (6) S Corp ~ IRC 404(a), Small Business Job Protection Act of 1998 Significant Trust & Estate Strategies due to: - Minority interest discounts - Lack of marketability discounts Keit h A. Mericka Man agin g Dire ctor - We alth Management, Private Wealth Advisor, Senior Portfolio Manager The ESOP Group UBS Financial Services Inc. 27

28 Estate planning hypothetical example ESOPs can provide significant estate planning tax benefits due to minority interest and lack of marketability discounting. ESOPs are also a powerful means by which a family can optimize its charitable objectives. 51% $10 Million $5.1 $4.9 Million Million $1.9 Million 100% 49% Keit h A. Mericka Man agin g Dire ctor - We alth Management, Private Wealth Advisor, Senior Portfolio Manager The ESOP Group UBS Financial Services Inc. Charitable Remainder Trust Marital Bypass Trust / FLP / GST 28

29 Who might be a suitable candidate? In our experience, an ideal ESOP candidate has: A minimum of 50 employees and annual payroll of $1 million or greater Been in business for at least 3 years C-Corp1 or S-Corp2 status Thinly traded (OTC-BB/Pinksheet) company considering going private Non-management shareholders looking for liquidity A capable succession management team An interest to grow through mergers or acquisitions Solid earnings history and able to secure bank financing Keit h A. Mericka Man agin g Dire ctor - We alth Management, Private Wealth Advisor, Senior Portfolio Manager The ESOP Group UBS Financial Services Inc. 29

30 Introduction David Jasmund is a founding partner of PCE, with 20+ years of experience in mergers & acquisitions (M&A) and Employee Stock Ownership Plans (ESOPs). As a member of the firm s Employee Stock Ownership Plan (ESOP) investment banking practice, David is considered an expert in the ESOP community. Closing more than $2 billion in ESOP transactions David and the PCE investment bankers are frequent speaker, panelist and presenter at both regional and national ESOP-focused conferences and events. 30 David Jasmund Shareholder, Investment Banking PCE Investment Bankers, Inc. David brings 38 years of business experience to the table, along with a unique business perspective as a highly successful entrepreneur, business owner and advisor. Prior to his work at PCE, he grew a small insurance start-up of three people into a powerhouse that employed more than 1,200 people and generated annualized revenues of over $700 million. David offers business owners a personalized approach in identifying, implementing and executing M&A and ESOP transactions suitably structured for the future well-being and sustainability of their business. Some of his accomplishments include: engaging in M&A transactions and private equity placements as principal or on behalf of principals; positioning several smaller companies to be acquired by a publicly held company; and growing revenues in another series of strategic M&A transactions.

31 Financing Sale to ESOP David Jasmund Shareholder, Investment Banking PCE Investment Bankers, Inc. 31

32 Traditional and Commercial Financing David Jasmund Shareholder, Investment Banking PCE Investment Bankers, Inc. Companies borrow funds from a bank in the normal course of their business cycle Businesses approach the lender with a request to establish a loan for a certain purpose: Working capital needs Acquisitions of fixed assets Expansion capital 32

33 Lender ESOP Financing David Jasmund Shareholder, Investment Banking PCE Investment Bankers, Inc. The same principles of standard commercial lending with additional considerations Companies borrow funds to lend to the ESOP to buy shares Often little or no collateral value assigned to the loan Lending primarily on company cash flow but principal payments are tax deductible 33

34 Financing Options Current Market Senior Financing 2.0x to 3.0x EBITDA 3.0% to 5.0% Interest 1 st lien on all assets Mezz Financing 1.0x to 2.0x EBITDA (in addition to senior debt) 9.0% to 12.0% Interest Plus equity based participation PIK &/or warrants All in costs 13.0% to 18.0% David Jasmund Shareholder, Investment Banking PCE Investment Bankers, Inc. Seller Financing Must track 3 rd party rates, terms & structure Can provide upside opportunity for seller Likely interest only until Senior/Mezz debt reduced 34

35 Financing Options Key Benefits Senior Financing Expansion of existing company debt Provides liquidity at closing Lowest financing cost Mezz Financing Less restrictive covenants No or low principal payments Generally not collateralized Bridges liquidity gap David Jasmund Shareholder, Investment Banking PCE Investment Bankers, Inc. Seller Financing Company maintains greater flexibility and control Generates interest income for seller Allows for quick close Can provide upside opportunity for seller 35

36 Financing Options Key Disadvantages Senior Financing Senior claim on cash flows Has the ability to impose financial covenants Regulations Mezz Financing High interest rate Synthetic equity is usually included Total amount limited by cash flow David Jasmund Shareholder, Investment Banking PCE Investment Bankers, Inc. Seller Financing No cash at closing Little diversification for seller 1042 Rollover implications 36

37 Financing: Bank vs. Seller David Jasmund Shareholder, Investment Banking PCE Investment Bankers, Inc. Proceeds at Closing Diversification Control/Flexibility Oversight Upside Opportunity Interest Income Quick Close Senior/Mezz Seller 37

38 Summary of Financing Alternatives ESOP transactions provide exiting shareholders a myriad of debt and equity financing alternatives. David Jasmund Shareholder, Investment Banking PCE Investment Bankers, Inc. 38 Selling shareholders could also have access to additional complementary sources of capital to fund liquidity utilizing: private equity, employees and existing qualified plans.

39 Structuring Sale to ESOP David Jasmund Shareholder, Investment Banking PCE Investment Bankers, Inc. 39

40 Structuring Sale to ESOP The Partial Sale Sell at least 30% to qualify for the 1042 tax deferral (C-Corp only) Sell as much as company can finance Partial diversification; hold equity for upside 100% Sale Tailor 3 rd party financing Back fill with seller paper Refinance seller paper in stages David Jasmund Shareholder, Investment Banking PCE Investment Bankers, Inc. Potential for equity kicker in seller paper 40

41 Company Tax Considerations Payroll Deduction Up to 25% of eligible payroll may be contributed to the ESOP on an annual basis as a tax deduction C-Corp May make additional deduction of interest on the ESOP loan Can also deduct dividends paid to the ESOP Ownership Shield S-Corporations are pass through entities for tax purposes David Jasmund Shareholder, Investment Banking PCE Investment Bankers, Inc. ESOPs are exempt from federal income tax The portion of a company owned by an ESOP is exempt from federal income tax 41

42 S-Corp Ownership Shield Taxable Owner 50% ESOP 50% Exempt from fed income tax Operating S-Corp $ 5.0MM pass through pre tax income David Jasmund Shareholder, Investment Banking PCE Investment Bankers, Inc. Pre-transaction tax liability = $2.0MM Post-transaction tax liability = $1.0MM 42

43 The Benefits of a Partial ESOP - Seller David Jasmund Shareholder, Investment Banking PCE Investment Bankers, Inc. 43

44 Dual Track Sale Process David Jasmund Shareholder, Investment Banking PCE Investment Bankers, Inc. 44

45 Dual Track Process ESOP Track 3 rd Party Sale Track David Jasmund Shareholder, Investment Banking PCE Investment Bankers, Inc. 45

46 Dual Track Process Dual Track allows exiting shareholders to be simultaneously marketed to both external and internal buyers Provides shareholders peace of mind that all options are explored while delivering optimized results via a competitive process that provides certainty to close. Dual Track takes no longer to execute and the fees are not substantially higher than a traditional third-party only sale. Key Dual Track Benefits David Jasmund Shareholder, Investment Banking PCE Investment Bankers, Inc. Increased Options Increased competition Added sale points Allows owners ability to make informed decisions 46

47 Dual Track Benefits Increased Options Increased Competition Added Sale Points Informed Decision- Making Provides shareholders the most exhaustive buyers list Includes external buyers and the internal buyer Creates highly competitive market for the Company May lead to increased purchase price/transac tion terms ESOP sets base price Decisions are made relatively early in the process Does not delay transaction timeline significantly longer than traditional third party sale. Allows owner ability to decide once they have received letter of intent from external buyer and financing offers from ESOP David Jasmund Shareholder, Investment Banking PCE Investment Bankers, Inc. Key Dual Track Benefits 47

48 Comparing Liquidity Events ESOP 3 rd Party Sale Maximize cash at closing Allows owner immediate exit No succession Tax advantaged sale Minimize indemnifications Company independence David Jasmund Shareholder, Investment Banking PCE Investment Bankers, Inc. Control of company Minority sale (diversification) 48

49 Introduction Daniel M. Zugell, CLU, ChFC, LUTCF is Director/Senior Vice President of BTA, Inc. with a wealth of hands-on and management experience spanning many financial service disciplines. Dan s experience includes the formation of MetLife s ESOP program and as a Director of MetLife s Institutional Specialized Benefit Resources division. Since 1998, Dan has emerged as a national presence on ESOP matters as a frequently published author and featured speaker. Dan holds a B.A from Grove City College, has earned several advanced financial designations and is a member of The ESOP Association, National Center for Employee Ownership, The Estate Planning Council and the Society of Financial Service Professionals. Ambassador - Pennsylvania Center for Employee Ownership. Daniel M. Zugell, CLU, Ch FC, LUTCF Director/Senior Vice President BTA, Inc. 49

50 Step 1: Investigative/Education Phase ESOPs 101 meeting/webinar Data gathering for complimentary review to determine if an ESOP is worthy of further investigation Last 3 years of financials Year to date balance sheet and income statement Trailing twelve month income statement Five year forecast if available Daniel M. Zugell, CLU, Ch FC, LUTCF Dire ctor/se nior Vice President BTA, Inc. 50

51 Step 2: Preliminary Analysis Value analysis determine a potential range of value for the company Preliminary review of current financials Estimate current free cash flow Estimate current debt capacity Review of payroll and deductible contribution limits to the ESOP Plan Daniel M. Zugell, CLU, Ch FC, LUTCF Dire ctor/se nior Vice President BTA, Inc. 51

52 Step 2: Preliminary Analysis Tax consequences Capital Gains impact to the selling shareholders Deductions to the company Alignment of shareholders/corporative objectives Review of ESOP sale scenarios Tax savings to company and selling shareholders Total sale proceeds Recommendations and next steps Daniel M. Zugell, CLU, Ch FC, LUTCF Dire ctor/se nior Vice President BTA, Inc. 52

53 Step 3: Feasibility Study Tighten valuation range taking into account a five year income statement forecast Factor in growth plans, capital expenditures and working capital Review current ownership structure and determine impact the ESOP will have on the capital structure of the company Review the company s Articles of Incorporation and Bylaws to insure compatibility with an ESOP Daniel M. Zugell, CLU, Ch FC, LUTCF Dire ctor/se nior Vice President BTA, Inc. 53

54 Step 3: Feasibility Study Review and analyze the impact of the proposed transaction on current and projected financial statements and cash flow Determine the ability and desirability of outside financing, including term debt, LOC, etc. Review subordinated debt structure Determine warrant structure (if applicable) Review payroll limitations to ensure ERISA compliance Daniel M. Zugell, CLU, Ch FC, LUTCF Dire ctor/se nior Vice President BTA, Inc. 54

55 Step 3: Feasibility Study Weigh shareholder election of IRC 1042 and consequences Provide a summary of tax benefits that the implementation of an ESOP will provide Provide detailed breakdown by shareholder of total proceeds received on an annual basis Present scope of work to implement and provide all-in cost range The Feasibility Study will leave the shareholders with as much understanding as possible as far as what can be achieved and what cannot by implementing an ESOP. Timeframe: 4-6 weeks upon receiving all requested due diligence material Daniel M. Zugell, CLU, Ch FC, LUTCF Dire ctor/se nior Vice President BTA, Inc. 55

56 Step 4: ESOP Implementation Engage service professionals Quarterback Corporate ERISA Counsel ESOP Trustee ESOP Trustee s Counsel Valuation firm Third Party Administrator Corporate reorganization (if applicable) Plan document design Negotiate/secure financing (if applicable) Daniel M. Zugell, CLU, Ch FC, LUTCF Dire ctor/se nior Vice President BTA, Inc. 56

57 Step 4: ESOP Implementation Negotiation of stock sale price and transaction terms with Trustee Finalize corporate structure and stock classes Review loan, shareholder, employment, buy-sell, voting, etc. agreements Ensure adequate management succession/incentive strategy and contracts Effectuate IRC 1042 design and execution (if applicable) Review seller s estate implications Fee Range: All-in fee for service providers is usually between 1%-4% depending on size and scope of work Timeframe: 3-4 months Daniel M. Zugell, CLU, Ch FC, LUTCF Dire ctor/se nior Vice President BTA, Inc. 57

58 Step 5: Post-Transaction Employee communication rollout meetings to announce ESOP Provide actuarial study of company s 20 year projected repurchase liability and funding analysis Assure proper filing of government paperwork Daniel M. Zugell, CLU, Ch FC, LUTCF Dire ctor/se nior Vice President BTA, Inc. 58

59 Summary Preliminary Analysis Feasibility Study ESOP Implementation Post-ESOP Transaction Timeline 3 weeks 4 to 6 weeks 90 to 120 days 30 to 60 days Overview Daniel M. Zugell, CLU, Ch FC, LUTCF Dire ctor/se nior Vice President BTA, Inc. Background & objectives Preliminary valuation range Review of 2 ESOP sale scenarios Tax implications & cash flow Summary of benefits Unique circumstances Steps to develop a strategy and implement a plan Detailed analysis of ESOP structure & sales scenarios Debt structure Financing Corporate cash flow Warrants 1042 election Tax savings Shareholder s proceeds Transaction steps Implementation and planning coordination ESOP Plan design and formation Transaction Design Transaction Financing Final valuation Stock sale Employee meeting Repurchase Obligation Study General posttransactional consulting 59

60 Contact Info: Employee Stock Ownership Plans (ESOPs): Marc S. Schecht er Partner Butterfield Schechter LLP (858) Keit h A. Mericka Man agin g Dire ctor - Wealth Management, Private We alth Ad visor, Se n ior Portfolio Man age r The ESOP Group UBS Financial Services Inc. keith.mericka@ubs.com (877) David Jasmund Shareholder, Investment Banking PCE Investment Bankers, Inc. djasmund@pcecompanies.com (407) Daniel M. Zugell, CLU, Ch FC, LUTCF Director/Senior Vice President BTA, Inc. dzugell@bta.us.com (724)

61 Q&A: Employee Stock Ownership Plans (ESOPs): Marc S. Schecht er Partner Butterfield Schechter LLP (858) Keit h A. Mericka Man agin g Dire ctor - Wealth Management, Private We alth Ad visor, Se n ior Portfolio Man age r The ESOP Group UBS Financial Services Inc. keith.mericka@ubs.com (877) David Jasmund Shareholder, Investment Banking PCE Investment Bankers, Inc. djasmund@pcecompanies.com (407) Daniel M. Zugell, CLU, Ch FC, LUTCF Director/Senior Vice President BTA, Inc. dzugell@bta.us.com (724) You may ask a question at anytime throughout the presentation today. Simply click on the question mark icon located on the floating tool bar on the bottom right side of your screen. Type your question in the box that appears and click send. Questions will be answered in the order they are received. 61

62 ABOUT THE KNOWLEDGE GROUP The Knowledge Group is an organization that produces live webcasts which examine regulatory changes and their impacts across a variety of industries. We bring together the world's leading authorities and industry participants through informative two-hour webcasts to study the impact of changing regulations. Employee Stock Ownership Plans (ESOPs): If you would like to be informed of other upcoming events, please click here. Disclaimer: The Knowledge Group is producing this event for information purposes only. We do not intend to provide or offer business advice. The contents of this event are based upon the opinions of our speakers. The Knowledge Group does not warrant their accuracy and completeness. The statements made by them are based on their independent opinions and does not necessarily reflect that of The Knowledge Group s views. In no event shall The Knowledge Group be liable to any person or business entity for any special, direct, indirect, punitive, incidental or consequential damages as a result of any information gathered from this webcast. Certain images and/or photos on this page are the copyrighted property of 123RF Limited, their Contributors or Licensed Partners and are being used with permission under license. These images and/or photos may not be copied or downloaded without permission from 123RF Limited