Employee Stock Ownership Plans

 ESOP’s are a powerful tool in today’s world of corporate finance.  Like any other sophisticated tool, ESOPs must be planned and structured properly.  An ESOP is the most tax beneficial method of transferring company ownership.

 Tax Benefits

There are huge benefits to everyone involved in the transaction.  From the current owner (seller), to the buyers (employees) and finally, the corporation itself – all have tax benefits that can’t be found anywhere else.

       1.                  Seller – with proper planning, the seller can make this a tax-free sale.

       2.                  Employees – the employees literally get something for nothing.  They wind up owning shares in the company without having to pay tax on this benefit.  Furthermore, they never have to sign notes for that stock or guarantee loans for it.  In addition, this stock has a put option so that at some future date, the employee will have a liquid asset that can be a significant part of his net worth.

3.                  Corporation – an ESOP is the only structure that enables the company to write off note principal against ordinary taxable income.  If it is an ‘S’ Corporation, you can create a tax free entity.

 Purpose

An ESOP can be used for one of the following objectives: 

1.                  Company owner sells out to employees

2.                  Company acquires significant capital assets

3.                  Company acquires another company

4.                  Company restructures its current debt

 Prospects

An ESOP candidate should have some or all of the following characteristics:

      1.                  Adequate FMV - $3MM or larger

2.                  History of profits

3.                  Stable industry

4.                  Adequate payroll base

5.                  Successor management

 How Does an ESOP Benefit Your Firm

ESOPs will benefit your firm in several ways.

      1.                  You keep the client!

2.                  Increased fees – minimum fee $40,000

3.                  Participation in repurchase liability insurance fees (if licensed)

4.                  Elevate the quality of your practice

5.                  Increased client appreciation

If you have a client that might be a candidate for an ESOP, please complete the ESOP Pre-Qualification Form and the General Business Information and Due Diligence Questionnaire and e-mail or fax to us for a free mini valuation.

An ESOP executed through UBA will be extremely financially beneficial to your firm – far beyond your billable rate.

 The Ultimate Exit Strategy and Financial Tool

ESOPs are a powerful tool in today’s world of corporate finance.  Like any other sophisticated financial tool, however, ESOPs must be planned and structured properly.

 Experience Counts in ESOP Design and Implementation

UBA has assembled a team of experts in the design and implementation of ESOPs.  Our experience spans more than fifteen years, with numerous plans being implemented.  Our emphasis is placed on creativity in the planning and structuring phase to produce maximum benefits for the company and the selling shareholder.

 ESOPs can provide unparalleled financial benefits when applied properly to real-life needs and goals within today’s corporate environment.  Whether for reducingor eliminating taxes, growing through acquisition, building capital, planning for management succession and ownership transfer or reducing the cost burden of employee benefit packages, ESOPs deserve careful consideration by companies as a tool for future success and staying power.

 What is an ESOP?

An ESOP is a Qualified Plan under the Employees Retirement Income Security Act of 1974 (ERISA).  See sections 401(a), 4975(e)(7) and 501(a) of the Internal Revenue Code of 1986, as amended, and Section 407(d)(6) of ERISA, 1974.  What you can do with this powerful tool of personal and corporate finance is nothing short of amazing.

 An ESOP is a defined contribution, tax-qualified plan that has two distinguishing features:  (1) An ESOP is allowed to invest exclusively in the stock of its sponsoring company; and (2) an ESOP can borrow money.  A sponsoring corporation can contribute cash or stock to an ESOP on a tax-deductible basis, increasing cash flow.  Owners of privately held corporations can sell all or part of their stock to an ESOP for full Fair Market Value, often completely avoiding capital gains tax on the transaction.

 Why Consider an ESOP?  Four Powerful Uses

DID YOU KNOW you can sell your company stock to an ESOP and pay NO TAX on the transaction?  That’s right!  An ESOP provides the only way, under the U.S. Tax Code, to sell highly appreciated company stock and totally avoid capital gains tax on the transaction.

 This is the ultimate exit strategy!!

 DID YOU KNOW you can actually purchase capital goods with pre-tax dollars, if structured through an ESOP?  Think of the competitive advantage!

 DID YOU KNOW you can purchase another company with pre-tax dollars, if structured through an ESOP?  That means you’ll be paying on 66-cent-dollars for the purchase of the company.  Compare that to the normal after-tax cost of approximately $1.52!

 DID YOU KNOW you can refinance existing debt through an ESOP and fully tax-deduct Principal and interest on the repayment of the debt?  Sound too good to be true?  But it is true!  That’s the power of an ESOP.

 Benefits for the Shareholder

1.                  Tax-deferred (deferred permanently, if structured properly) transaction on the sale of stock to an ESOP (for owners of ‘C’ Corporations).

2.                  Seller obtains top dollar, controlling interest value on the sale of stock to an ESOP.

3.                  Shareholder can sell stock and remain in control.

4.                  Seller obtains additional annual income due to investing pre-tax dollars

5.                  Seller diversifies investments (all of the eggs are no longer in the company basket).

6.                  Seller obtains liquidity and flexibility for estate planning.

7.                  Seller has control over the sale of his/her stock and the orderly transfer of management responsibilities.

 Benefits for the Corporation

1.                  Corporation obtains 100% deductibility of PRINCIPAL and interest on an ESOP loan.

2.                  Corporation can fully deduct DIVIDENDS paid to reduce ESOP debt.

3.                  Corporation experiences increased cash flow due to the deductibility of principal on an ESOP loan.

4.                  Collateral for an ESOP loan is created outside the corporation.

5.                  Corporations engaging in ESOP transactions often obtain preferred terms on ESOP loans.

6.                  The selling Shareholder’s retirement is funded outside the corporation, relieving the company from the burden of funding retirement benefits.

7.                  Corporation can often experience increased cash flow due to the possible reduction in the seller’s corporation-provided compensation.

8.                  Ability to attract and retain productive employees.

9.                  Creates a take-over defense by means of a friendly voting block.

10.              Ability to give employees equity in the company with no payment on their part, on a tax-deductible basis to the corporation.

11.              Corporation can refinance existing debt on a tax-deductible basis.

12.              Corporation can merge with or acquire another corporation using pre-tax dollars.

13.              Corporation can purchase capital goods using pre-tax dollars.

14.              In some circumstances, corporation can recover taxes paid in previous periods.

15.              Corporation can increase its net worth and appraised value by rolling over existing qualified plans into an ESOP.

16.              Creation of a quasi-public market for Corporate stock – go public internally.  Employees have a “put option” and a market for their Company stock.  Increased morale.

There is a minimum 54% tax subsidy available in all ESOP transactions!

But that’s not all – ESOPs are now available for ‘S’ Corporations.  With proper structuring, the earnings from an ‘S’ Corporation can be partially or fully free from Federal Income Tax!

 16 Steps to a Successful ESOP Transaction

ESOP transactions are highly sophisticated and require the accomplishment of literally scores of tasks for successful implementation.  UBA’s internal checklist consists of 150 individual tasks to be accomplished by various team members.

UBA has grouped all of these tasks into 16 Steps to a Successful ESOP Transaction.  These basic building blocks are presented to help build knowledge and understanding of all team members involved in an ESOP transaction. 

1.                  Analysis of ESOP Pre-Qualification Form

2.                  Comprehensive Meeting with Potential Client

3.                  Feasibility Study

4.                  Comprehensive Valuation Study

5.                  Lender Negotiation and Selection

6.                  Analysis of Existing Qualified Plan (if any)

7.                  ESOP Plan Design

8.                  Document Preparation

9.                  Repurchase Liability Study

10.              Funding Analysis of Repurchase Liability

11.              Initiation of Bank Financing

12.              Qualified Replacement Property Recommendations

13.              Implementation of ESOP

14.              Third Party Administrator

15.              Employee Orientation

16.              Ongoing Support 

The Ideal Candidate of an ESOP

Is an ESOP for you?  If most of the following describes your company, the answer may be “yes”. 

• A Corporation (‘C’ Corp. or ‘S’ Corp.)
• Corporation has unused debt capacity (not heavily in debt).
• Corporation is profitable and can easily cash flow additional ESOP acquisition debt.
• Corporation pays taxes in the top marginal bracket.
• Corporation has been doing business successfully for at least five years.
• Corporation has payroll of at least $1,000,000.
• Business value of at least $3,000,000.
• Corporation doing business in solid industry.
• Majority shareholder interested in sharing equity ownership with employees in order to attract, retain and reward productive employees.
• Corporation with strong secondary management capable of taking over and desiring to do so.
• Corporation or majority shareholders desirous of buying out minority shareholders on tax-deductible basis
• Management interested in making acquisitions or purchasing capital goods on tax-deductible basis.
• Corporation wanting to refinance existing debt, resulting in the tax-deductibility of both principal and interest on the new debt.
• A corporation wanting to block a possible take-over attempt by creating a friendly voting block.
• A thinly-traded public corporation wanting to expand its stock ownership among its employees and provide an excellent employee benefit plan.
• A public corporation wanting to go private or sell off a division.

UBA Provides Unparalleled Service and Expertise 

• ESOP design and implementation.
• Strategic planning.
• Qualified valuations of ESOP companies.
• Financial consulting.
• ESOP financing and negotiations.
• Lender education
• Project management of entire process.
• All team members required to implement a successful ESOP.
• Technical strategies to accomplish stated goals.
• Repurchase liability studies.
• Employee education on ongoing basis.
• Ongoing support (the most important of our services).

Services for Existing ESOPs

UBA’s extensive experience in the design, development, implementation and valuation of ESOPs has provided a unique skill set to aid clients with existing ESOPs.  If you have an existing ESOP, and have questions, issues or problems needing attention, we are your one-stop source for help.  A few of the issues with which UBA can assist you in your existing ESOP are: 

• What do I do when our ESOP loan is nearing payoff and nearly all of the shares have been allocated?  Where is the benefit for new employees coming on board?
• The IRS has ruled in a PLR that only contributions to unallocated shares in an ‘S’ Corporation, ESOP can be used to pay down acquisition debt.  Our shares are fast becoming allocated.  What do we do?
• Our ESOP previously acquired 49% of the company’s issued and outstanding stock.  We are now ready to acquire the remainder of the stock.  How do we go about this transaction?
• Having Trustee problems?  Call UBA!
• Circumstances have changed considerably since implementing our ESOP.  For various reasons, we now want to discontinue the ESOP.  How do we go about that?
• We have never had a Repurchase Liability Study or properly planned for the emerging liability emanating from the ESOP.  What do we do?
• Our bank is claiming that we’re breaching our loan agreement covenants due to the special ESOP accounting requirements under SOP 93-6.  What do we do?
• We are not a ‘C’ Corporation, but have heard that it might be in our best interest to change to an ‘S’ Corporation for certain tax benefits.  Aren’t there built-in capital gains issues associated with that technique?  Is this the wise thing to do?
• Does our ESOP hinder or help with regard to my personal estate planning?
• Many of our shares are now allocated.  In what circumstances are our employees allowed to vote their allocated shares?

Incentive Packages for Executives

When ratable stock ownership among all employees is not enough, UBA will design special executive stock packages outside the ESOP.  These special stock-based incentive plans are meant to provide additional incentive to top management following the implementation of an ESOP.  Our plans are designed to attract and retain exceptional talent in your company. 

The Team

United Business Alliance LLC provides all the professional Team Members and all of the services required to design and implement your successful ESOP.  That is why we are unique in the industry. 

• Project Manager/Consultant
• CPA
• Attorney for ESOP
• Attorney for Corporation
• Valuation Professional
• Insurance Professional
• Trustee
• Plan Administrator
• Lender
• Investment Advisor