Selling your company to an ESOP How to transition your company by selling to your employees April 27, 2018
Our Speaking Panel Leslie A. Lauer, CFP, ChFC, CEPA UBS Financial Services Inc. The ESOP Group Managing Director Wealth Management Private Wealth Advisor Leslie.lauer@ubs.com (877) 794-1042 James G. Steiker SES Advisors, Inc. Chairman and CEO jsteiker@sesadvisors.com (215) 508-5643 Nick N. Sypniewski, ASA ComStock Advisors Managing Director nsypniewski@comstockadvisors.com (513) 813-4101
Today's Topics What is an ESOP? Why an ESOP? Steps to creating an ESOPs Who are the parties involved Benefits and tax advantages to all parties 1042 Election Why do business owners choose an ESOP? ESOP transaction process overview ESOP valuation basics Post-closing requirements When an ESOP doesn t work well Closing remarks
What is an ESOP? ESOPS are defined contribution plans that primarily invest in employer stock The Employee Retirement Income Security Act (ERISA) of 1974 is the primary governing law regulating ESOPs Congress passed a number of laws with favorable tax advantages to encourage business owners to establish ESOPs Congress intent was to create ownership and retirement assets for working-class Americans ESOPS are defined contribution plans that primarily invest in employer stock Owners can sell from 1% to 100% of their stock to the newly created ESOP in exchange for cash and/or promissory notes or new securities Shares are allocated to employee accounts annually (generally proportional to their annual compensation) Employees receive cash in exchange for their shares upon retirement, termination, disability, or death
Good ESOP Candidates Non-cyclical slow to medium growth Stable cash flow Ownership group interested in remaining involved/participating in the business Patient long-time horizon not seeking immediate cash payment in full Ownership group concerned about employees and/or long term future of company/motivated by "legacy" or mission goals in addition to cash Lack of cash strategic buyers willing to pay significant premium for the company 5
ESOP Advantages and Disadvantages Advantages Tax efficient Shareholder directed process Control over timing Legacy Disadvantages Complex Regulated Often involve Seller notes
Steps in an ESOP Transaction Feasibility study Financing Appraisal Plan Design Legal Documents Closing IRS Determination Letter
"S" Corporation ESOPs S Corporation income attributed to shareholders ESOP as S Corp shareholder pays no taxes on its share of corporate income No section 1042 Capital Gains Deferral
Initial C Corporation ESOP Transaction Bank Cash Company Pledge of QRP?? Note & Collateral Cash Note & Pledge of Stock Shareholders Cash Company Stock ESOP
ESOP Loan Repayment Company Contributions or Dividends ($$$) ESOP Loan Payments ($$$) Loan Payments ($$$) Bank and/or Shareholder Release of Shares Pledged as Collateral and Share Allocations to Individual ESOP Accounts
Initial S Corporation ESOP Transaction Bank Cash Note & Collateral Company Shareholders Company Stock Cash & Sub. Note w/warrants Company Stock ESOP Note & Pledge of Stock
ESOP Loan Repayment Valuation Financing Effect of ESOP on overall benefits structure Legal/fiduciary risk Cost and complexity
ESOP Transaction Concerns Valuation Financing Effect of ESOP on overall benefits structure Legal/fiduciary risk Cost and complexity
ESOP Transaction Concerns Valuation Financing Effect of ESOP on overall benefits structure Legal/fiduciary risk Cost and complexity
ESOP vs Private Equity vs Strategic Buyer? Consideration 1 st Win 2 nd Place 3 rd Show/Last Valuation Strategic Sale ESOP Private Equity Liquidity at Close Strategic Sale Private Equity ESOP Liquidity in Future ESOP Private Equity Strategic Sale Post-Close Governance ESOP Private Equity Strategic Sale Legacy ESOP Private Equity Strategic Sale Management & Employees ESOP Private Equity Strategic Sale
ESOP vs. Strategic Sale ESOP Strategic Sale Due Diligence Limited and Less Disruptive Heavy Timing 3-4 Months 7-9 Months Existing Ownership Control Significant Minimal Indemnification Limited Common Purchase Price Independent Valuation Market Dependent Tax Deferral Substantial Minimal
Why do Business Owners Choose an ESOP? Process Benefits Continuity of Governance Continued Growth & Pursuit of Strategic Initiatives Employee Advantages Tax Benefits ESOP process offers superior timing and confidentiality relative to third-party sales Certainty of close and ease in negotiating are more favorable compared to third-party sales Management continues to run the company - employees are not granted operating control and do not receive financial and strategic information Interests of owners, management and employees are aligned for success Preservation of corporate culture Company can aggressively pursue growth or strategic initiatives: Tax savings expedite debt repayment and free up cash for growth Superior platform for acquisitions Flexibility to structure ESOP transaction with responsible levels of debt, allowing continued growth Improves further the company's ability to recruit and retain top talent Increased productivity and reduces employee turnover Reduces (or eliminates) income tax obligations to the federal government Increases net earnings, debt capacity and repayment and equity appreciation Provides selling shareholders with the potential of deferring capital gains tax indefinitely (1042 election)
Benefits for Selling Shareholders Benefits Creation of a legacy entity Potential to sell in increments while maintaining ownership control Confidentiality of corporate information Minimum business disruption during sales process Certainty of close control over timing Ability to defer gains on sale through a Section 1042 deferral
Benefits for Employees For management and the employees the ESOP is a retirement plan Benefits Meaningful benefit plan at no cost Usually no operational restructuring Ability to roll distribution into an IRA Ability to influence financial future Synthetic equity plan for key management
Benefits for the Company Benefits Transaction involves limited business disruption C Corp ESOPs can deduct principal of ESOP acquisition debt An S Corp 100% ESOPs pay no Federal income tax Culture of ownership leads to higher business productivity
Overview of IRC 1042 Rollover
Key Requirements for 1042 Tax Deferral 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. Qualified Replacement Property ("QRP") includes stocks, bonds, or other securities of operating companies incorporated in the U.S. If the qualified replacement property is held until death of the selling shareholder, the property transfers to heirs with a stepped-up cost basis. The following criteria must be met before qualifying for IRC Section 1042: ESOP must own 30% of company after completion of transaction Selling shareholder cannot have received stock to be sold to the ESOP from: Retirement plan Pursuant to a stock option As restricted stock As a form of compensation Minimum of 3-year holding period for stock sold to the ESOP Non-publicly traded C-Corporation Common stock having the greatest voting and dividend rights or preferred stock convertible into such common stock 15-month window for reinvestment of proceeds, commencing 3 months prior to and ending 12 months following the sale of stock Must reinvest into Qualified Replacement Property ("QRP") Note: ESOP laws are complex. Specific recommendations on courses of action are dependent on a thorough review of the facts and circumstances relative to a particular company and its shareholders. Neither UBS Financial Services Inc. nor its employees provide tax or legal advice. You must consult with your attorney or tax advisor regarding your personal circumstances.
Qualified Replacement Property Congress intention is to incentivize owners of private companies who sell to an ESOP to reinvest into corporate America. Eligible 1 Common Stock Preferred Stock Convertible Bonds Corporate Fixed Rate Bonds Corporate Floating Rate Notes ("FRNs") Not Eligible 1 Municipal Bonds Exchange Traded Funds (ETFs) U.S. Government Bonds Mutual Funds Foreign Securities REITs Bank CDs Master Limited Partnerships (MLPs) 1 Eligible issuer must have: 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.
Primary IRC Section 1042 Diversification Strategies Common reinvestment strategies available to an individual seeking tax deferral: Passive Strategy Buy and hold selected high-quality stocks and/or corporate bonds Simplest, yet least flexible strategy Requires cash from the transaction equal to the full amount of the QRP to be purchased Unless seller has other cash sources, this strategy is not available for seller-financed transactions Flexible Strategy Purchase high-quality Floating Rate Notes Monetize (borrow) against the value of the FRNs (does not trigger tax) Use loan proceeds to support an actively managed portfolio or for any other purpose, including real estate, private investments or general expenses, or allow for QRP investment where there is seller financing Appropriate for seller-financed transactions and provides the most flexibility. However the potential for margin calls and the forced sale of QRP with the resulting adverse tax consequences must be factored into proper planning Combination of Flexible/Passive Strategy Benefits of Flexible Strategy Provides for enhanced cash flow Provides for greater optimization of sale proceeds
For Seller-Financed Transactions In today s capital constricted environment, many sellers are choosing to finance their own transactions. Here too we offer proven solutions to take advantage of capital gains deferral. Ideal Attributes for FRNs Issues to Consider High loan-to-value provides for lowest down payment High degree of safety / credit quality Potential loan / margin calls may result from fluctuations in the market price of the FRNs Additional cash or other assets should be available to meet potential loan / margin calls Long maturity / call protection In the unlikely event a loan / margin call cannot be met, investor may be forced to sell QRP resulting in the prorata loss of the tax deferral Low Price volatility Floating interest rate Putable annually
General Tax Ramifications
ESOP Tax Preferences Effective deduction of principal on ESOP loan repayment Section 1042 Capital Gains Deferral Deduction of dividends paid on ESOP shares S Corporation ESOP non-recognition of corporate income
Liquidity Strategies Chart Note: This outline is for general informational purposes only; numerous exceptions and qualifications apply. Liquidity Strategy Tax Consequences Control Characteristics of Seller/ Shareholders Other Considerations 100% Sale Transaction C-Corp Asset Sale Corporation 21% Federal 8.84% California Shareholder 20% Federal 13.3% California 3.8% Net Investment No control retained Interested in making an exit from the business Short-term focused Priority of immediate liquidity Tax rates assume individual Shareholder/member Current market conditions; ability to locate potential buyers If S-Corp, possible use of 336(e) or 338(h)(10) election to increase tax benefits to buyer with increased purchase price to cover incremental tax costs for Seller C-Corp Stock Sale 20% Federal 13.3% California 3.8% Net Investment S-Corp or LLC Sale of Assets 20% or 37% Federal 13.3% California 3.8% Net Investment (if passive) S-Corp or LLC Sale of Stock/membership interests 20% Federal (37% for LLC hot assets) 13.3% California 3.8% Net Investment (if passive) N/A 1 California taxes deductible against Federal income
Leveraged Recapitalization Leveraged Recapitalization C-Corp Earnings & Profits (E&P) 20% Federal (assuming qualified dividend) 13.3% California 3.8% Net Investment Interested in retaining control Liquidity is important, but not an immediate focus Believes in future success of the Company Interest rates (currently low) Cash flow of Company in order to service debt Amounts in Excess of E&P Treated Tax-Free return of basis, and then as Sale of Stock No dilution 20% Federal 13.3% California 3.8% Net Investment S-Corp (to the extent distribution exceeds basis in stock assuming no E&P) 20% Federal 13.3% California 3.8% Net Investment (if passive) LLC No current tax; tax potentially deferred until sale Debt increases basis in LLC interest, but not in stock of S-Corp
ESOP Recapitalization ESOP Recapitalization C-Corp Stock Sale Deferred tax on sale proceeds provided sellers qualify and elect under Section 1042 of the IRC and acquire qualified replacement properties S-Corp Stock Sale 20% Federal 13.3% California 3.8% Net Investment (if passive) Potential to retain control where ESOP is minority shareholder Interested in retaining some control Liquidity is important, but willing to delay full proceeds in order to receive potentially greater return Believes in future success of the company Possible to build up cash in the company normally used to pay tax Ability to take advantage of 1042 deferred gains if C- Corp. 100% ESOP-owned S-corp. pays no tax (other than 1.5% California) Possible for sellers or equity investor to participate in 50% of the upside with the ESOP through warrants, stock appreciation rights and other forms of synthetic equity. Ability to convert to a C- corp. and back to an S-corp. (after 5 years) to take advantage of tax benefits Interest in engaging in subsequent acquisitions on a tax-free basis Interest in using ESOP as a marketing tool to attract talent Additional costs associated with implementation and administration of ESOP Trustee involvement
Parties to an ESOP
Who is Involved in the ESOP Transaction? Company And Shareholder Representation Company Financial Advisor Lead and manage transaction process Transaction and capital structure and pro forma cash flow analysis Negotiate price, terms, and conditions with trustee Place debt created in the transaction Employee benefit analysis Shareholder after-tax returns analysis Assist trustee in due diligence Company and ESOP Legal Counsel Prepare required corporate documents for ESOP Assist in ESOP transaction design Draft ESOP/ERISA documents Negotiate and draft legal documents for transaction Assist the Company with various transaction-related tax and legal questions ESOP Plan Administrator Consult on ESOP plan design Assist with employee benefit analysis Conduct repurchase liability study Employee communication Other Important Advisors Accountants (Audit, QofE, Taxes) Wealth management Estate planning counsel ESOP Representation Institutional ESOP Trustee Transact on behalf of your employees Insure compliance with DOL/ERISA law ESOP Legal Counsel Review legal documents Ensure compliance with all ERISA/DOL/IRS law Assist trustee in legal due diligence ESOP Financial Advisor Valuation and fairness opinion to trustee Assist trustee in business and financial due diligence 32
ESOP Transaction Process Overview VALUATION RANGE RETURNS ANALYSIS OPTIMAL CAPITAL STRUCTURE DESIGN PRESENTATIONS AND NEGOTIATIONS CLOSE AND FUND STEP ONE STEP TWO STEP THREE STEP FOUR STEP FIVE Gather financial information, prepare valuation analysis, and refine the transaction strategy Evaluate market returns for retained/new capital and structure employee/ management benefits Model future cash flows, under various ESOP and capital structures, debt capacity, shareholder objectives, internal ESOT loan Formally present the Transaction to ESOP Trustee and negotiate price, terms, and conditions Secure and place third-party debt securities, and shareholder rollover securities, and finalize all legal documentation PHASE ONE: ARCHITECTURE AND DESIGN PHASE TWO: EXECUTION & IMPLEMENTATION Go or No Go
Typical ESOP structures An ESOP is essentially an LBO that conveys several tax benefits to the company and its owners. Leveraged ESOP Lender Loan Company Inside Loan Repayment Lender Inside Loan Repayment & Share Release Loan Repayment ESOP Company Stock Cash Contributions & Dividends Existing Shareholders Suspense Account QRP Company creates ESOP Company borrows funds from Lender and re-lends the proceeds to the ESOP ( Inside Loan ) ESOP uses funds to purchase shares of existing shareholders Company services the 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
Parties to an ESOP The Board, Trustee & Valuation Advisor
What is different in an ESOP Company? It has three additional governance layers The Board of the Corporation Trustee ESOP Committee or Independent Fiduciary Trustee-owner governed by ERISA law Not corporate law
Legal Responsibilities Trustee or Board of Trustees has responsibility under ERISA to look out for the sole interests of ESOP participants and beneficiaries Financial Advisor Legal Counsel Board of Directors has responsibility under corporate law to look out for the interest of shareholders and company Administrator Legal Counsel Investment Banker
What are the Requirements Post-Closing? Valuation Performed annually Typically completed when draft financial statements become available Recordkeeping/Third-party administration Performed annually Participant statements IRS Form 5500 filing Share allocations Compliance testing Plan audit/financial statements Legal Update plan document/amendments as needed Other management incentives Design, implement non-esop long-term compensation
Trustee Role Approve and execute ESOP purchase of employer stock Managing the assets of the ESOP trust Establishing the annual Company stock price Voting the Company stock shares held by the ESOP Administering employee pass through voting of ESOP shares when legally required Ensure good corporate governance in place Collaborative approach with management If ESOP owns controlling Interest Some independence in Board of Directors Oversight of compensation Employment agreements Communication
Trustee Role Continued Satisfying the Trustee s ERISA fiduciary responsibilities: Act prudently Act solely in the interest of the plan s participants Act in accordance with the plan documents
Trustee Transaction Considerations Evaluate and employ a qualified and independent valuation advisor Investigate the valuation advisor s qualifications and determine if independent Evaluate the proposed sale of Company stock from existing shareholders to the ESOP Perform due diligence with respect to the Company and the ESOP Transaction Determine whether it is reasonable to rely on valuation advisor s advice Negotiate in good faith on behalf of the ESOP the price, terms, and conditions of the sale of Company stock in the ESOP Transaction Ensure that the ESOP pays no more than adequate consideration for the Company stock Ensure that the ESOP Transaction is fair to the ESOP from a financial point of view
Trustee Transaction Considerations Financing Seller notes IRR fair vs. market Ability for company to service the debt Warrants Economic impact at exercise change of control situation clearly document the purpose of warrants as a financing mechanism Management Incentive Programs Stock Appreciation Rights (SARs) Retention performance based usually tied to EBITDA Phantom stock program 409a compliance
Valuation Advisor
Valuation Process Trustee represents ESOP Trustee engages Valuation Firm Gather financial information and other documents Due diligence meeting with Company Valuation Analysis Issue a draft valuation report to the Trustee Valuation presentation and review meeting between Trustee and Valuation Firm Issue final valuation and opinion letter 44
ESOP Valuation Fair Market Value The price at which an asset would change hands between a willing buyer and a willing seller, when the former is not under any compulsion to buy and the later is not under any compulsion to sell, and both parties are able, as well as willing, to trade and are well informed about the asset and the market for such asset. Key Concepts: Title I of the Employee Retirement Income Security Act of 1976, as amended ( ERISA ) and the U.S. Department of Labor s Proposed Regulations relating to the definition of adequate consideration (Prop. Reg. Section 2510.3-18(b)(2)(1)) ( Proposed Regulations ) Arm s-length transaction Hypothetical buyer and seller No undue influence to buy or sell Knowledgeable buyer and seller ESOP is a financial buyer 45
Valuation Approaches Income Approach Discounted Cash Flow Method Capitalized Cash Flow/Earnings Method Market Approach Guideline Public Companies Method Merger and Acquisition Method Rules of Thumb Prior Transactions Asset Approach Adjusted Book Value Method Liquidation Value Excess Earnings Method 46
Weighting of Valuation Approaches No set formula What is central tendency of RANGE OF VALUES? Do methods support each other? What is the most appropriate method? Income approaches Tend to receive greatest weight Availability/reliability of forecast Market approach Quality/comparability of market data Consistency among multiples Asset approach Often a floor value 47
What Drives Value Cash Flow EBIT - Taxes + Depreciation & Amortization - Capital Expenditures +/- Working Capital Changes = Free Cash Flow Volatility of Cash Flow (Volatility = Risk) Growth of Cash Flow Market Conditions (Stock market, M&A markets, cost of capital) Balance Sheet (Cash, debt, working capital, etc.)
ESOP Valuation Issues Scrutiny of projections Control vs minority value Synthetic equity Tax affecting S corporations The ESOP put right and lower Discounts for Lack of Marketability Compensation vs dividends Post Transaction Issues ESOP tax shield Repurchase Obligation liability 49
ESOP Accounting
ESOP Accounting Financial statement impact An inside loan to the ESOP is reported in equity of the balance sheet as a contraequity account not as a receivable Negative equity as a result of "unearned ESOP shares" Additional debt leverage, impaired balance sheet Financial ratios are impacted, make sure to assess with bank covenant compliance Lack of understanding of ESOP by bankers, suppliers, bonding agents, shareholders, etc. Interest income from "inside" loan is not reported Future years non cash expense in the P&L
Financial Statement Impact of an ESOP Balance Sheet Before ESOP Transaction Assets $20,000,000 Liabilities $8,000,000 Equity $12,000,000 $20,000,000 Balance Sheet After ESOP Transaction Assets $20,000,000 Liabilities $8,000,000 ESOP Debt $10,000,000 $18,000,000 Equity $12,000,000 Unearned ESOP Shares ($10,000,000) $2,000,000
When an ESOP Doesn't Work Well Selling shareholder has unrealistic expectation as to company value Selling shareholder wants to immediately leave Targeted ownership in the hands of a few Too few employees / Too little payroll Start-up company Aging employee population Company profits erratic or nonexistent No successor management team Key brand, technology or intangible asset in high demand from specific buyer
Get Good Advice Put Together the Right Team Identify providers (get referrals) Speak with other ESOP companies Identify internal team members Ask questions Understand strengths and experience of team members Establish a transaction budget
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Structured investments are not traditional investments and investing in a structured investment is not equivalent to investing directly in the underlying asset. Structured investments may have limited or no liquidity, and investors should be prepared to hold their investment to maturity. The return of structured investments may be limited by a maximum gain, participation rate or other feature. Structured investments may include call features and, if a structured investment is called early, investors would not earn any further return and may not be able to reinvest in similar investments with similar terms. Structured investments include costs and fees which are generally embedded in the price of the investment. The tax treatment of a structured investment may be complex and may differ from a direct investment in the underlying asset. UBSFS and its employees do not provide tax advice. Investors should consult their own tax advisor about their own tax situation before investing in any securities. In addition, investors should familiarize themselves with the particular market risks and the other risks associated with the specific underlying asset. Investing in structured investments is not suitable for all clients given their complexity and significant risks. Unlike traditional bank CDs, structured CDs do not pay fixed interest payments at prevailing market rates or may not pay any interest payments, and they are subject to market risk in addition to interest rate risk if they are sold prior to maturity. The value of a structured CD is dependent upon fluctuations in interest rates and the performance of the specified underlying asset and the limited secondary market for structured CDs may also adversely affect their price if liquidated prior to maturity. Unlike traditional bank CDs, structured CDs may be subject to IRS treasury regulations that apply to contingent payment debt instruments. Investors should consider the applicability and limitations of FDIC insurance to an investment in structured CDs. A credit rating reflects the creditworthiness of the issuer and not of any particular structured investment. It is not a recommendation to buy, sell or hold securities, and may be subject to revision or withdrawal at any time by the assigning rating organization. The creditworthiness of the issuer does not affect or enhance the likely performance of the investment other than the ability of the issuer to meet its obligations. For more information about risks associated with structured investments, please visit our website at ubs.com/spkeyrisks. Sustainable Investing S&P 500 Index: http://us.spindices.com/indices/equity/sp-500/ MSCI KLD 400 Social Index: https://www.msci.com/msci-kld-400-social-index This report is provided for informational and educational purposes only. Nothing herein constitutes an offer to sell, or solicitation of an offer to buy, any security, investment or product, or to engage in any investment strategy. Investing involves risks, including the potential of losing money or the decline in value of the investment. Performance is not guaranteed. ESG Investing Risk Environmental, Social and Governance factors may inhibit a portfolio manager s ability to participate in certain investment opportunities that otherwise would be consistent with its investment objective and other principal investment strategies. Underlying companies in a particular fund may not necessarily meet exemplary standards in all aspects of ESG performance; nor is any company perfect when it comes to corporate responsibility or sustainability. 2018 MSCI ESG Research LLC Reproduced by permission. Although UBS information providers, including without limitation, MSCI ESG Research LLC and its affiliates (the ESG Parties ), obtain information from sources they consider reliable, none of the ESG Parties warrants or guarantees the originality, accuracy and/or completeness of any data herein. None of the ESG Parties makes any express or implied warranties of any kind, and the ESG Parties hereby expressly disclaim all warranties of merchantability and fitness for a particular purpose, with respect to any data herein. None of the ESG Parties shall have any liability for any errors or omissions in connection with any data herein. Further, without limiting any of the foregoing, in no event shall any of the ESG Parties have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. Important information about our Wealth Management Services As a firm providing wealth management services to clients, UBS Financial Services Inc. offers both investment advisory services and brokerage services. Investment advisory services and brokerage services are separate and distinct, differ in material ways and are governed by different laws and separate arrangements. It is important that clients understand the ways in which we conduct business and that they carefully read the agreements and disclosures that we provide to them about the products or services we offer. 57
Important disclosures Alternative Investments Alternative Investments U.S. of UBS Financial Services Inc. provides investment management services to qualified high net worth and institutional clients. Eligibility requirements begin, generally, at a net worth greater than $5 million for individuals (with spouse) and $25 million for entities. This is not an offer to purchase or a solicitation to sell any security. Investors should be aware that alternative investments are speculative, subject to substantial risks (including the risks associated with limited liquidity, the use of leverage, short sales and concentrated investments), may involve complex tax structures, strategies, and may not be appropriate for all investors. Alternative investments may not be required to provide periodic pricing or valuation information to investors, there may be delays in distributing tax information to investors, they are not subject to the same regulatory requirements and protections as mutual funds, and they may be subject to high fees and expenses, which will reduce profits and returns. Alternative investments are not deposits or obligations of, or guaranteed or endorsed by, any bank or other insured depository institution, and are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other governmental agency. They should not constitute an entire investment program. Alternative investment strategies are investment vehicles that are formed by professional money managers to afford them greater flexibility to manage money in any market environment. These strategies typically have flexibility regarding the types of securities in which they can invest (e.g., derivatives such as swaps, options and futures contracts), the types of positions they can take (e.g., long and short positions) and the amount of leverage they are permitted to employ. A professional money manager can use these and other techniques to modify market exposure and create portfolio characteristics that may be desirable for certain clients (e.g., reduced correlation to financial markets, potential lower volatility, and performance in down markets). This flexibility can add value when used skillfully. This flexibility can, however, add additional elements of risk and complexity, especially because alternative investments are often long-term, illiquid investments that are not easily valued. Note that due to the nature of alternative investments, the risk and return assumptions used in this analysis may tend to overstate potential benefits but not fully reflect potential risks with respect to those investments. Financial Planning Important Information about our financial planning services: As a firm providing wealth management services to clients, UBS is registered with the U.S. Securities and Exchange Commission (SEC) as an investment adviser and a broker-dealer, offering both investment advisory and brokerage services. Advisory services and brokerage services are separate and distinct, differ in material ways and are governed by different laws and separate contracts. It is important that clients carefully read the agreements and disclosures we provide about the products or services offered. For more information, please visit our website at ubs.com/workingwithus. In providing financial planning services, we may act as a broker-dealer or investment adviser, depending on whether we charge a fee for the service. The nature and scope of the services are detailed in the documents and reports provided to you as part of the service. Financial planning does not alter or modify in any way a client s existing account(s) or the terms and conditions of any account agreements they may have with UBS. For more information speak with a Financial Advisor. UBS Financial Services Inc., its affiliates and its employees do not provide tax or legal advice. Clients should speak with their independent legal or tax advisor regarding their particular circumstances. Investing in structured products involves significant risks, such as the credit risk of the issuer, potential downside market risk and limited or no liquidity. Clients should carefully read the detailed explanation of risks, together with other information in the relevant offering materials. Investment Advisory Separately managed account programs offered by UBS Financial Services Inc. are subject to minimum amount requirements. Minimum account size is generally $100,000. Higher minimums apply to certain strategies and Multiple Style Accounts. Since separately managed account programs are not suitable for all investors, information that will be presented at the seminar is provided for informational purposes only. UBS Financial Services Inc. must review an investor s investment objectives, risk tolerance and liquidity needs to determine suitability prior to an investment with any manager or investment program. There are fees associated with investing in separately managed accounts. For more information about the fees associated with separately managed accounts, please refer to the account program Form ADV disclosure brochure or contact your Financial Advisor. For more details regarding our investment advisory programs(s) including fees, services, features, and client suitability, please see the Form ADV Disclosure Brochure, which can be obtained from your Financial Advisor or accessed at ubs.com/accountdisclosures. Important information about advisory & brokerage services It is important that you understand the ways in which UBS Financial Services Inc. (UBS) conducts business and the applicable laws and regulations that govern the firm. As a firm providing wealth management services to clients, UBS is registered with the U.S. Securities and Exchange Commission (SEC) as an investment adviser and a broker-dealer, offering both investment advisory and brokerage services. Though there are similarities among these services, the investment advisory programs and brokerage accounts UBS offers are separate and distinct, differ in material ways and are governed by different laws and separate contracts. It is important that you carefully read the agreements and disclosures UBS provides to you about the products or services offered. While UBS strives to ensure that these materials clearly describe the nature of the services provided, please do not hesitate to contact your Financial Advisor team, sample, if you would like clarification on the nature of your accounts or services you receive from us. This presentation is for informational and educational purposes only and should not be relied upon as investment advice or the basis for making any investment decisions. The views and opinions expressed may not be those of UBS Financial Services Inc. UBS Financial Services Inc. does not verify and does not guarantee the accuracy or completeness of the information presented. UBS Financial Services Inc., its affiliates and its employees are not in the business of providing tax or legal advice. Clients should seek advice based on their particular circumstances from an independent tax or legal advisor. 58