B.O.S.S Workshops
(Business Owner Strategy Sessions)
Maximize Company Sale Value
Clint Edgington, CFA
Mark Fissel, RFC
www.BeaconHillAdvisory.com
Roy Messing
Ohio Employee Ownership Center
Kent State University
113 McGilvrey Hall
Kent, OH
Beacon Hill Investment Advisory
Columbus, Ohio
March 18, 2010
Outline
 Overview of Reasons for Employee Ownership
 Management Buyout vs. Employee Buyout
 Recognizing Good Candidate Companies for Sale
to Employees
 ESOPs vs Employee-Owned Coops
 Costs
 Provisions
 Steps for an Employee Buyout
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Uses of Employee Ownership
 Owner Driven
 Succession Planning
 Competitiveness Strategy
 Tax Advantaged Corporate Financing
 Employee Driven
 Averting a Plant Shutdown
 Securing Job and Career
4
Reasons for Employee Ownership
(multiple reasons possible)









averting shutdown or major job loss
ownership succession
divestiture of plants & divisions
blocking a takeover or purchase by another company
financing expansion of company
reducing borrowing costs
replacement of another benefit plan
additional benefit plan
philosophical commitment to employee ownership
44%
5%
58%
11%
6%
10%
15%
10%
35%
Source: Real World of Employee Ownership (2001)
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Management Buyout vs.
Employee Buyout via ESOP or Coop
 Common Characteristics:
 Buyers have small amount of funds available
 Buyers must use borrowed funds
 Assets of company used as collateral
 Future cash flows of company used to repay debt
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Management Buyout vs.
Employee Buyout via ESOP or Coop
Buyers
Tax Incentives
Sale or Gift
Management
ESOP/Coop
Key Managers
None
Sale
All Employees
Several
Gift
--NO!
–It’s a Sale!
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Recognizing Good Candidate Companies for
Sale to Employees
 Profitable business
 No family members involved in the business
 Employees see jobs as worth having and business as worth
owning – high seniority
 Owner and employees regard each other as “family”
 Owner has 3-7 years to implement ownership succession
 Partnership between owner and employees for this period is
seen positively by both
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Recognizing Good Candidate Companies for
Sale to Employees
 Owner willing to sell to employees
 Capable management succession team in
place
 Assets available to serve as collateral
 Future cash flows are predictable
 Company has ability to handle additional debt
 likely it can obtain financing
 Sufficient time available to do the transaction
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Recognizing Good Candidate Companies for
Sale to Employees
Number of Employees:
 30  ESOP can usually be justified
20-30  depends on the specific situation
< 20  ESOP very difficult to justify,
Employee-Owned Coop more
appropriate
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Set Up Costs
Attorney
Valuation
Trustee – External
Trustee – Internal
Administration
ESOP
$20,000
8-12,000
10-25,000
-0-0-
EO Coop
$20,000
6-10,000
N/A
N/A
N/A
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Ongoing Annual Costs
Attorney
Valuation
Trustee – External
Trustee – Internal
Administration
ESOP
$5-10,000
5-8,000
10-25,000
-04-7,000
EO Coop
$5,000
-0N/A
N/A
N/A
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Lesson re Costs
 KISS
 Simple Plan  Lower Costs
 Complex Plan  Higher Costs
 Coops are less expensive than ESOPs
 Coops are preferred for companies with < 20 employees
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ESOP vs. Coop
ESOP
EO Coop
Protected by ERISA
Yes
No
Capital Gain Tax Deferral
Available to Seller for Sale
to Employees (1042 Rollover)
Yes
Yes
Transaction Valuation Required Yes
Yes
Annual Valuation Required
No
Yes
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ESOP vs. Coop
ESOP
EO Coop
1 Vote =
1 Share
1 Person
Voting on Normal Issues
Trustee,
Direct
Direct is optional
Voting on Major Issues
Direct
Direct
Board Selection/Election
Many
Majority must be
methods are elected by
acceptable members
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ESOP vs. Coop
ESOP
EO Coop
Employee Payment
Not usually
Yes
Membership Fee
$-0-
$300-30,000
Membership Optional? Automatic if eligible
Yes, not required
Normal Payment of
Ownership Benefit
After Termination
While employed,
8-15 Year Cycle
Payment to Employee
Valued at
Fair Market Value
Book Value
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ESOP vs. Coop
 Ownership of < 100% of company:
 ESOP: Any % ownership is viable long-term
 Coop: Only 100% ownership is viable long-term

Company is either a coop or it’s not – can’t be a partial coop
 Coop: HOWEVER, < 100% ownership is acceptable
during transition period of Coop being in process of
purchasing 100%
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ESOP Tax Incentive for Seller
Sale to Management
or Outside Buyer
Proceeds
$1,000,000
Capital Gain 1,000,000
Capital Gain
Tax @ 15% 150,000
Net to Seller 850,000
Sale to Employees
through ESOP
$1,000,000
1,000,000
-01,000,000
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ESOP Tax Incentive for Company
Sale to Management
or Outside Buyer
ESOP Loan
$1,000,000
Principal Repayment
1,000,000
Tax Deductible?
Tax Deduction @ 34%
Net Loan Cost
No
-01,000,000
Sale to Employees
through ESOP
$1,000,000
1,000,000
Yes
340,000
660,000
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Why Sell to an ESOP?
Sale to Management Sale to Employees
or Outside Buyer
through ESOP
Selling Price
$1,000,000
$1,000,000
Tax Savings:
Capital Gains Tax
-0150,000
Principal Deduction
-0340,000
Total Tax Savings
-0490,000
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Transaction Reality
 The tax incentives available to an ESOP and Employee-
Owned Coop often make the transaction “doable” that
without the tax incentives is not “doable”.
21
Time Required
 Retiring Owners may “percolate” the idea for years
before deciding to implement the Succession Plan
 Typical time required to implement:
 ESOP: 6-9 months
 Coop: 4-6 months
 Quickest time seen:
 ESOP: 10 weeks
 Coop: 4 months (limited experience)
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Steps for an Employee Buyout
 Educate seller & key employees about ESOPs
and/or Employee-Owned Coops
 Alert parties, especially seller, to fiduciary
responsibility
 Obtain “ballpark estimate” valuation of business
 No sense continuing if valuation is unacceptable to
selling owner
 Establish buyout committee
 Conduct preliminary feasibility study
 Educate employees about buyouts
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Steps for an Employee Buyout (cont’d)
 Prepare business plan
 Obtain final business valuation for transaction
 Negotiate sales agreement with seller
 Develop & approve official ESOP or Coop Plan
documents
 Arrange financing
 Close deal & celebrate!
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Employee Ownership Summary
 Significant tax advantages
 Flexibility
 Employee Ownership + Ownership Culture linked to
improved company performance
 Successful succession planning
 Not suitable for all circumstances
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Contact Information
Roy Messing
rmessin2@kent.edu
330-672-0333
Ohio Employee Ownership Center
Kent State University
113 McGilvrey Hall
Kent, OH 44242
www.oeockent.org
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