Alan Taylor. Partner Bowling Green, KY BKD, LLP.

Transcription

1 ESOPs: Creating a Legacy June 28, 2012 Alan Taylor Partner Bowling Green, KY BKD, LLP ataylor@bkd.com To Receive CPE Credit Participate in entire webinar Answer polls when they are provided If you are viewing this webinar in a group o Complete group attendance form with Title & date of live webinar Your company name Your printed name, signature & address o All group attendance sheets must be submitted to training@bkd.com within 24 hours of live webinar o Answer polls when they are provided If all eligibility requirements are met, each participant will be ed their CPE certificates within 15 business days of live webinar 2 1

2 ESOPs: Creating a Legacy June 28, 2012 Alan Taylor Partner Bowling Green, KY BKD, LLP ataylor@bkd.com BKD ESOP Team Successfully facilitated more than % ESOPs nationwide involving wide range of industries Transaction size ranges from $5 million to more than $300 million Not just deal team, works with companies post-transaction, which gives us unique perspective in planning & implementation As part of BKD, allows us to better integrate financial & tax planning/structuring & evaluate other succession alternatives Works with some of largest 100% ESOPs in U.S. Substantial amount of work related to assisting ESOP companies with acquisitions/joint ventures 4 2

3 Continue a Legacy & Implement ownership transition plan Preserve culture, jobs & community Provide stockholder liquidity (over time) in tax-efficient sale Reduce or potentially even eliminate corporate income tax Retain control (regardless of level of ESOP ownership) Reward long-term employees Reward key management Uniquely position company for growth via acquisitions 5 What Is ESOP? Qualified retirement plan Similar to profit sharing plan, except o Designed to invest primarily in company stock o ESOP can borrow money (leveraged ESOP) to purchase company stock Stock is held by ESOP trust o ESOP trust is legal shareholder o Employees are beneficial (not actual) owners in value of stock allocated to their account o Employees do not receive stock Governed by IRC & ERISA, with oversight by IRS & DOL 6 3

4 Polling Question 1 Which of the following is a key difference between an ESOP & other qualified retirement plans? A. ESOP s primary investment is stock of sponsor company B. ESOP provides guaranteed rate of return for participant C. ESOP is not required to file Form 5500 D. ESOP is not subject to ERISA E. Not sure 7 ESOP Statistics Approximately 10,000 ESOPs covering 10 million employees Majority are in privately owned companies Approximately 5,000 are majority owned Approximately 4,000 are 100% ESOP owned o Less than 100 in 1998 Source: 8 4

5 Benefits to Owner Sell company at fair value Can continue to run company o Receive reasonable compensation o Participate in ESOP (unless 1042 is elected) o Select & mentor next generation management Favorable tax treatment o Treated as stock sale (vs. asset sale) o IRC Section 1042 gain deferral o Installment treatment available to extent seller-financed Federal long-term capital gain rates scheduled to increase from 15% to 20% in 2013! 9 Company Benefits Company repays acquisition debt with pre-tax dollars Interest & PRINCIPAL on acquisition debt is taxdeductible If 100% ESOP-owned S corporation, company pays no federal & generally no state income tax o Currently approximately 34% federal savings o Federal tax rates on S corporation income scheduled to increase in 2013! Can result in more productive workforce o More communication = better results 10 5

6 Polling Question 2 100% ESOP-owned S corporations are exempt from federal income tax. o True o False 11 Leveraged ESOPs in General ESOP borrows money to purchase stock from selling stockholder(s) Similar to traditional leveraged buy-outs, except o o o Allows owner to remain in control Tax benefits to seller & company Over time, wealth is transferred to broad-based employees 12 6

7 How Does Leveraged ESOP Work? Company Loan (external loan) ESOP Loan (internal loan) ESOP Stock Purchase 13 How Is Company Loan Repaid? Tax-Free Profits! Loan Repayment 14 7

8 Company Loan Considerations Terms are independent of ESOP Loan o Faster repayment o Higher interest rate o Collateralized by company assets Options for Company Loan o Traditional bank financing Collateral, cash flow & strength of management o Seller financing Subordinated to bank Increased repayment flexibility o Mezzanine Interest, PIK, warrants o Combination of two or three above 15 How Is ESOP Loan Repaid? Tax-Deductible Contribution Loan Repayment Annual Stock Allocations 16 8

9 ESOP Loan Considerations Has no cash flow impact! Contributions & dividends can be used to repay ESOP Loan o Contributions generally limited to 25% of compensation Contributions to repay loan are tax-deductible o Tax planning opportunity in initial year of 100% ESOP Shares are released & allocated to employees annually as loan is repaid ESOP Loan in 100% ESOP is generally minimum of 15 years 17 Polling Question 3 Which of the following statements below is true? o Amortization terms of Company & ESOP Loan must be identical o Shares are released from suspense as ESOP Loan is repaid o Company Loan can only consist of bank financing o Not sure 18 9

10 How Employees Benefit Retirement benefit invested in company stock Employees incentivized to improve stock value &, as result, their retirement benefit o Communication! Longer employee stays, more stock they should receive Once receive retirement benefit, generally can continue to defer taxes by using IRA 19 ESOP Plan Design Eligible employees participate o Subject to age & service requirements Shares allocated annually based on compensation (subject to IRS limits) Annual statement of ESOP account balance o Do not have to share company financial information 6-year or 3-year cliff vesting Receive benefit in cash at retirement, disability or death Delay in receiving benefit if leave for normal termination o Wait longer of 5 years or repayment of ESOP Loan o Paid in installments over 5 years 20 10

11 Executive Compensation Important to success of ESOP o Attract & retain quality management team o Align ESOP & management interests Employment contract o Salary & bonus structure o Noncompete Synthetic equity o Incentive stock options o Stock appreciation rights Approval by independent ESOP trustee o Reasonable compensation o Dilution o Overall fairness 21 Company Organization - 100% ESOP 22 11

12 Polling Question 4 The ESOP Trustee is responsible for making day-today decisions regarding company operations. o True o False o N/A 23 Illustration of Tax-Free Growth Assume o ABC Company earns $1 million per year o ABC Company earns 5% on every dollar reinvested o ABC Company tax rate is 40% Year Compounded After-Tax Growth Compounded Tax-Free Growth 5 3,281,000 5,664, ,085,000 12,892,

13 100% ESOP Acquisition Advantage Subsidiary 1 Tax-Free Gain Treatment for Sellers Subsidiary 2 ABC Company, Inc. (S corp) ABC Company, Inc. Employee Stock Ownership Trust (100% Owner) 25 Transaction Timeline Generally 3- to 5-month process Initial discussions Phase 1 o ESOP structure study o Preliminary valuation Phase 2 o Lender proposal & selection process Phase 3 o Due diligence performed by ESOP & its advisors o Documents drafted o Final negotiations Closing 26 13

14 When ESOP May Be Right! Owner wants to preserve company legacy but is thinking about retirement ESOP culture is good fit Owner is willing to carry some of financial risk, i.e., seller notes, for period of time Generally fair value of equity of $5 million or more Generally 50 employees or more Stable cash flow Potential for significant corporate income tax savings 27 Alan Taylor Partner

15 Continuing Professional Education (CPE) Credits BKD, LLP is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: The information in BKD webinars is presented by BKD professionals, but applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor before acting on any matters covered in these webinars. 29 CPE Credit This presentation may be eligible for CPE credit upon verification of participant attendance; however, credits may vary depending on state guidelines For questions, complaints or comments regarding CPE credit, please BKD Learning & Development Department at training@bkd.com 30 15