The Perfect Buyer –
An ESOP?
March 9th & 10th, 2015
Participants:
• Ron Gilbert, President, ESOP Services, Inc.
• Jim Parham, Managing Partner, Transport Capital Partners
• Bill Prevost, President and CEO, Quickway Distribution Services,
Inc.
• Robert Bearden, President, Robert Bearden, Inc.
• Randy Vernon, President, Big G Express, Inc.
Insert Big G Video Here
Agenda
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Carrier Summary
The Ideal Situation
ESOP Overview
Tax Shields
Advantages
Challenges
Is an ESOP for You?
Questions from the Audience
Big G Express
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Shelbyville, TN
467 tractors
100% owned by ESOP
January 2009 become an ESOP
Combination of Bank and Seller financing
Quickway
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Converted to C Corp for the sale in 2004; then became a
100% ESOP-owned S Corp in 2005
Nashville, TN
1400 tractors
100% owned by ESOP
Bank and Seller financing
Elected the “Tax-free” rollover (but undone during the
Great Recession)
Robert Bearden, Inc.
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Cairo, GA
200 tractors
July 1, 2012 date of sale
100% owned by ESOP
Sold to an ESOP (Quickway)
When the Stars Align
 The ESOP pays a very competitive price for a
partial or complete buyout
 Sellers pay no capital gains tax
 The corporation operates as a tax-free entity
 Banks provide attractive financing
 ESOP participants have a significant wealth building
opportunity, turnover reduced
 The business is perpetuated
Employee Stock Ownership Plan
(ESOP)
 A unique financial technique for the
perpetuation of successful privately-owned
businesses that provides employees of that
business a “piece of the action”
 A direct stake in the success of the business
Overview
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11,000 ESOPs in U.S. (10% of private sector)
3,500 majority owned by the ESOP
In a broad range of industries
70% of ESOPs are in companies with fewer
than 250 employees
 As small as a few dozen employees and as
large as 100,000 (Publix Supermarkets)
Financing
 Experienced ESOP lenders aggressively
“hunting” for deals
 Seller financing can provide cushion
 Warrants attached to seller debt provide up side
potential
 100% ESOP vs. partial (successor management
team in place??)
ESOP Lenders
 Bank
 Loan is to the company, which makes
“back-to-back” loan to ESOP
 Typically 5 - 7 years
 Assessment of company credit similar to other
loans
 Selling shareholders receives cash up front
 Sellers can collateralize shortfall with proceeds
from ESOP sale (securities)
ESOP Lenders (continued)
 Owner/selling shareholder
 Take back a subordinated note with warrants
 Taxed on principal upon receipt at capital gains and interest as ordinary
income under installment sale treatment
 Principal can be “tax free”
 The Company
 Cash-rich company can make loan to the ESOP
 Advantage: company repays itself with tax-deductible contribution
 Private equity group
 Mezzanine financing subordinated to the bank, no collateral
 May be interest only for several years
Discussion on How Carriers Are
Financing their Deals
Tax Shields
 The ESOP tax shield equals 40% - 80%
 Every $1,000,000 of ESOP transaction provide
$400,000 - $800,000 in tax savings
 Tax-deductible principal repayment IRC 404(a)(9)
 Tax-free S corporation income IRC 409(p) and
512(a)
 Tax-deferred sale – C corporation stock IRC 1042
Perpetuation Planning C Corporation
IRC 1042 “Tax-Free” Rollover
 Seller can elect to defer gain on C corporation
shares sold to ESOP by reinvesting all or any
portion of the sale proceeds in Qualified
Replacement Property (“QRP”)
 QRP is stock or debt instruments of a domestic
operating corporation
 QRP must be acquired within 12 months of the
 ESOP sale (or 3 months before)
 After the sale, the ESOP must own at least 30% of
company
Perpetuation Planning C Corporation
IRC 1042 “Tax-Free” Rollover (continued)
 QRP can be pledged as collateral
 Floating Rate Notes (“FRNs”) provide excellent
collateral, and are suitable for monetization
 Seller must have owned stock for at least three years
 Seller cannot have acquired the stock in a “Section 83”
transaction, nor from a qualified retirement plan
 Seller, certain related individuals, and greater-than-25%
owners generally cannot participate in ESOP
 “stepped-up” basis at death under current tax law
Discussion of the Tax Impacts on
Sellers
Competitive Price
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Compared to financial buyer
5%-10% marketability discount
10-15% minority discount
30% greater net proceeds if “tax-free” rollover
applies
Discussion of Current Pricing
Environment
Advantages
 Retains employees – lower turnover rates (30
years of studies)
 Employees share directly in equity growth
 Employer contributions tend to be larger than
profit sharing contributions
 ESOP stock allocated proportionate to
compensation
 Proven motivator
 Accounts accumulate tax-free
What Advantages did the Carriers
Experience?
Challenges
 Government agency oversight
 IRS
 Clarity – Good continuing dialog, ongoing
 Department of Labor – Partial clarity and dialog
 (GreatBanc - DOL 2014 settlement)
Challenges (continued)
 Repurchase Obligation
 Corporate Obligation
 Spread over 5 to 11 years
 Similar to budgeting for capital equipment
Challenges (continued)
 Control
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Keep ESOP at minority level
Majority ESOP, proper board and committee
structure, i.e. nominating, etc. allows ongoing
operating control
- Trustee votes for Board of Directors
 Marketing it to employees
Carriers’ Comments on Challenges
Future Sale of Company
“An offer you can’t refuse”
 Minority ESOP or majority ESOP with equity
incentives for key executives
 Buyouts are typically at substantial premiums
 Life span of ESOPs – 6 mos to 40 years
Comparison of After-Tax Proceeds
IPO
100%
Recap
Stock Swap
ESOP
8%
75%
40%
50%
25%
100%
90%
100%
50%
0%
Percent available to invest in
diversified portfolio
Percent remaining in
company stock
The Perfect Buyer – An ESOP?
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Competitive price
No capital gains tax (low basis?)
Tax-free corporate income (S corporation)
Bank financing
Seller financing with upside
Lower turnover
Business perpetuation
Questions from the Audience
Resources
www.transportcap.com
www.esopservices.com
www.nceo.org
www.esopassociation.org