Ohio Employee Ownership Center
2007 Ohio Employee Ownership Conference
Akron, Ohio
April 20, 2007
New Transaction Model for Going from Partial
to 100% ESOP Ownership
Joseph L. Putt - Moderator
ComDoc, Inc.
Uniontown, OH
jputt@comdocinc.com
David Ackerman
Susan E. Gould
Morgan, Lewis & Bockius, LLP
Chicago, IL
dackerman@morganlewis.com
Stout Risius Ross
Chicago, IL
sgould@srr.com
William W. Vogelgesang
Meg Shrum
South Franklin Street Partners
Chagrin Falls, OH
wwv@sfspartners.com
National Cooperative Bank
Washington, D.C.
mshrum@ncb.coop
SCOPE OF PRESENTATION
Transaction Structuring
Banker’s Role
Role of Valuation Advisor
Equity Investor’s Role
PLANNING OBJECTIVES
Liquidity
Maximize Price
100% ESOP-Owned S Corp.
PLANNING OBJECTIVES:
WHY GO TO 100% ESOP OWNERSHIP?
Assumption
50% ESOP
$10 Million Income
Income
Tax
Distribution
Retained Earnings
C Corp
S Corp
$10,000
3,500
0
$ 6,500
$10,000
0
3,500
$ 6,500
TRANSACTION STRUCTURING:
REDEMPTION vs. ESOP STOCK PURCHASE
Tax Treatment for Sellers
Creditors’ Rights
HR Considerations
Equity Incentives for Management
Fiduciary Considerations
TRANSACTION STRUCTURING:
TAX TREATMENT FOR SELLERS
1042?
Installment Reporting
TRANSACTION STRUCTURING:
CREDITORS’ RIGHTS
Seller Financing?
Note from ESOP
Note from Company
TRANSACTION STRUCTURING:
HUMAN RESOURCE CONSIDERATIONS
ESOP Purchase
Leverage impact on current ESOP
participants
Loan terms
Redemption: shares to future employees
Changing terms and length of inside loan
Reshuffling
Internal market
ESOP purchase of treasury shares
TRANSACTION STRUCTURING:
EQUITY INCENTIVES FOR MANAGEMENT
Synthetic Equity
Planning Considerations
IRC §409(p)
One Class of Stock
Tax Treatment
IRC §409A
FIDUCIARY CONSIDERATIONS
Buyout Price
Access to Employee 401(k) Funds
Other Fairness Issues
Rates of return to ESOP and warrant holders
Dilution to ESOP
Executive compensation
ESOP Administration
IRC §409(p)
Repurchase liability
Solvency Analysis
BANKER’S ROLE:
GENERAL
Financing Alternatives
Underwriting and Covenants
BANKER’S ROLE:
FINANCING ALTERNATIVES
Senior Debt
Subordinated Debt
Seller Financing
Employee Funds
Equity
BANKER’S ROLE:
SOURCES OF FINANCING
Banks
Other Financial Institutions
Private Equity Funds
BANKER’S ROLE: UNDERWRITING
Three plus years of financial statements
Look at cash flows historically and
projected for adequate consolidated debt
service coverage
Add backs
Collateral coverage must be adequate
Post-ESOP management team: seller
staying on, others stepping up, new
management hired?
Special accounting treatment
BANKER’S ROLE:
EVALUATING FINANCING ALTERNATIVES: COSTS
Interest Rate
Fees & Expenses
Prepayment Penalties
Field Exams & Appraisals
Reporting
BANKER’S ROLE:
EVALUATING FINANCING ALTERNATIVES:
FLEXIBILITY & CONSTRAINTS
Affirmative Covenants
Negative Covenants
Financial Covenants
Amortization
Acquisitions
ROLE OF EQUITY INVESTOR:
GENERAL
Sources of Equity
Current Market Conditions
ROLE OF EQUITY INVESTOR:
SOURCES OF EQUITY
Institutional
Management
Employees
Other
ROLE OF EQUITY INVESTOR:
CURRENT MARKET CONDITIONS
Attractive Transaction Structures
Attractive Valuations
Attractive Financing
interest rates
leverage multiples
coverage ratios
ROLE OF EQUITY INVESTOR:
TAX-PLANNING OPPORTUNITIES
Dividend Tax Rate
Capital Gains Tax Rate
ROLE OF EQUITY INVESTOR:
RETURNS ANALYSIS & REQUIREMENTS
Pricing
Board Representation / Control
Exit Rights
ROLE OF VALUATION/FINANCIAL ADVISOR:
GENERAL
Adequate Consideration
Fairness
Solvency
ROLE OF FINANCIAL ADVISOR:
ADEQUATE CONSIDERATION/FAIRNESS
Adequate Consideration – “that the ESOP
is not paying more than fair market value
for the stock”
Adequate Consideration Standard Not
Applicable
ESOP not a party to transaction
Fair Market Value standard still relevant to:
Trustee
Board of Directors
Management
Selling Shareholders
ROLE OF FINANCIAL ADVISOR:
ADEQUATE CONSIDERATION/FAIRNESS
Fairness Analysis
Financial fairness analysis
Price paid (in the range of fair market value)
Relative fairness (compare treatment of
different shareholders), cash vs noncash
All other elements of transaction –
–
–
–
–
Management equity incentives
Indemnification/Escrow terms
Noncompete/Mgmt contract buyouts
Financing Terms
Does not include non-financial elements
(loss of jobs, reduced benefits, etc).
ROLE OF FINANCIAL ADVISOR:
OPINIONS
Need for Separate Advisor
Board of Directors –
Concerns – fraudulent conveyance,
prudence, solvency, independence
Structuring Advisor (Investment Bank)
Negotiates all parts of deal
Solvency Opinion
From Investment Bank or Independent
Advisor
ROLE OF FINANCIAL ADVISOR:
OPINIONS
Need for Separate Advisor
ESOP Trustee –
Concerns –prudence, solvency, “act in best
interests of participants”
Financial Advisor to Trustee
May participate in negotiations – particularly with
regards to terms of financing
– Financial covenants
– Mezzanine or seller debt
» Warrants, implied rate of return, default provisions,
board seats
Fairness Opinion
The transaction, in its entirety, is fair to the ESOP
from a financial point of view
ROLE OF FINANCIAL ADVISOR:
SOLVENCY
Need for Solvency Opinion
Standards for Determining Solvency
ROLE OF FINANCIAL ADVISOR:
SOLVENCY
Solvency Opinion – 3 PART OPINION
… it is our Opinion as of the date of this letter that,
assuming that the Transaction is consummated as
proposed, both before and immediately after giving effect
thereto:
on a pro forma basis, the fair value and present fair saleable
value of the Company’s assets exceeds the Company’s stated
liabilities, including identified contingent liabilities;
the Company will be able to pay its debts as they become
absolute and mature; and
the capital remaining in the Company after the Transaction is
not unreasonably small for the business in which the Company
is engaged, as management has indicated it is now conducted
and is proposed to be conducted following the consummation of
the Transaction.
ROLE OF FINANCIAL ADVISOR:
SOLVENCY
“assuming that the Transaction is
consummated as proposed” means all analysis is conducted
‘proforma’ to include all the effects of
the transaction
All new debt components
All new contingent claims (warrants,
equity incentive plans, etc.)
ROLE OF FINANCIAL ADVISOR:
SOLVENCY
“the fair value of the assets
exceeds the liabilities”
Fair market value of assets = fair market
value of the enterprise
Value of assets must support or exceed
liabilities, including debt to fund
purchase price
ROLE OF FINANCIAL ADVISOR:
SOLVENCY
“the company will be able to pay its
debts as they become due”
Based on projections
Projected free cash flow must be able to show
coverage of required interest and principal
payments, as well as all other claims on
business
Projected free cash flow takes into
consideration required capital expenditures and
working capital
TEST projections for reasonableness/sensitivity
ROLE OF FINANCIAL ADVISOR:
SOLVENCY
“the company will have adequate
capital”
Appropriate working capital available
post-close of transaction for
management to manage the business
Revolver/line of credit availability
Joseph L. Putt
Vice President
Finance & Planning
ComDoc, Inc.
Joe is a Berkeley, California native. He is a Corporate Officer and Vice President - Finance & Planning of ComDoc,
Inc. He joined ComDoc in 1999 and previously held the positions of Controller and Director - Finance & Planning. In
his present position, Joe is responsible for ComDoc’s leasing programs, strategic planning, financial reporting, tax
compliance, treasury operations, purchasing, accounts receivable, accounts payable & payroll. .
Joe is active in the community. He is a graduate of Leadership Akron’s 2001-2002 class and a member of The
University of Akron’s Financial Advisory Board. He served from 2001-2006 as a board member and treasurer of
Project: LEARN of Summit County. Joe is active in numerous youth baseball programs. He is an honorary board
member of Big Brothers & Big Sisters of Summit County.
Joe graduated from Akron - Kenmore High School in 1977. He attended The University of Akron and graduated with a
BSBA in Finance (1981) and MBA in Finance (1988). As an undergraduate, he graduated summa cum laude and
received the Financial Executive Institute’s Award as the outstanding finance student his senior year. Joe received his
CPA designation from the State of Ohio in 1985. He is a member of the American Institute of CPA’s and the Ohio
Society of CPA’s. He serves on De Lage Landen’s Dealer Advisory Council, a leading leasing provider within the
copier industry. Joe is also a member of Ricoh's Dealer Administration Council
Prior to joining ComDoc, Joe was Vice President - Finance of Simon Ladder Towers, Inc. in Ephrata, Pa. (1991-1999),
Vice President - Finance, Eagle Plastics, Inc. in Stow, Ohio (1986-1991) and CPA/Manager, Moore-Stephens-Apple
CPA’s in Akron, Ohio (1981-1986).
Joe enjoys golf, motorcycling, bicycling, softball, and travel. He and his wife, Denise, reside in Hartville with their 17
year-old son, Jonathan. Joe, Denise and Jon attend the Chapel in Marlboro. Other family members include their purebred German Shepherd, Gator, and cat, Boomerang.
David Ackerman
Morgan, Lewis & Bockius
77 West Wacker Drive
Chicago, IL 60601
Phone: 312.324.1170
Fax: 312.324.1001
Email: dackerman@morganlewis.com
Education: Harvard Law School, 1974, JD
Princeton University, 1971, AB
David Ackerman is a partner in the Employee Benefits and Executive Compensation Practice of Morgan, Lewis &
Bockius LLP, a national law firm with over 1,250 lawyers in 22 offices. Mr. Ackerman co-chairs the Morgan Lewis
ESOP team, which is one of the largest ESOP law practices in the country. Mr. Ackerman is one of the most
knowledgeable ESOP lawyers in the nation, having advised hundreds of corporations and their shareholders and
directors regarding the use of ESOPs in a wide variety of transactions, including leveraged buy-outs, corporate stock
repurchases, ownership succession transactions, and corporate reorganizations. He also regularly serves as legal
counsel to ESOP trustees and lenders.
Mr. Ackerman is the immediate-past Chair of The ESOP Association’s Advisory Committee Chairs’ Council and is a
past Chair of The ESOP Association’s Legislative and Regulatory Advisory Committee. He also has served on the
Board of Directors of The ESOP Association
Mr. Ackerman has lectured and written extensively on the subject of ESOPs. He is the author of over 20 published
articles regarding ESOPs; and he speaks regularly at the annual national conferences of The ESOP Association and of
the National Center for Employee Ownership and at their local and regional conferences. Mr. Ackerman has also
made presentations regarding ESOPs at numerous other seminars, including programs sponsored by the American
Institute of Certified Public Accountants and the American Society of Pension Actuaries; continuing legal education
programs of several states, including Illinois, Minnesota and Kentucky; and programs sponsored by the Illinois, Ohio,
Michigan, and Heart of America chapters of The ESOP Association, the Ohio Employee Ownership Center, the
Chicago Bar Association, the Illinois CPA Society, and many banks and other financial institutions.
Meg Shrum
Senior Vice President
National Cooperative Bank
2011 Crystal Drive
Suite 800
Arlington, VA 22202
Phone: 703.302.1943
Fax: 703.647.4207
Email: mshrum@ncb.coop
Meg Shrum is a Senior Vice President and relationship manager with the National Cooperative Bank headquartered in
Washington DC. She joined NCB in 2000 and serves as Team Leader for the bank’s ESOP lending group which
focuses exclusively on providing specialized financing for ESOP transactions nation-wide.
Prior to joining NCB, Meg was a Managing Director with Riggs National Bank’s Domestic Private Banking Division
in Washington DC, and was previously with Security Pacific Bank in Las Vegas, NV. She received an MBA from the
University of Arizona in entrepreneurship in 1987 and is a native of North Carolina.
William W. Vogelgesang
South Franklin Street Partners
10 ½ E. Washington St.
Chagrin Falls, OH 44022
Phone: 440-264-8005
Fax: 440-247-3060
Email: wwv@sfspartners.com
Education:
Master of Business Administration, 1981, The Ohio State University.
Bachelor of Science Cum Laude, 1979, The Ohio State University
A co-founder of South Franklin Street Partners, Bill aims at serving the needs of middle market clients and investors from helping smaller companies access capital markets to providing junior capital at appropriate returns to investors.
His focus is on niche market segments, using South Franklin Street Partners' depth of experience to exceed the
expectation of clients, investors and referral sources.
Bill was a Managing Director and Principal of Brown, Gibbons, Lang & Company, L.P. (BGL), a middle-market
investment banking firm with offices in Chicago and Cleveland, where he worked for seven years. He served as
Chairman of the Brown, Gibbons, Lang & Company's Management Committee. He was active in corporate finance
and mergers and acquisitions.
Bill has experience in structured ESOP transactions and was a board member of an ESOP-owned company. He also
spent three years as a principal and the Chief Financial Officer of a hazardous waste acquisition and management
company. Prior to joining BGL, Bill served as President of Colonial Capital, Inc., a NASD broker-dealer specializing
in corporate development engagements for corporate and investment fund clients. He also worked for several years as
a banking officer at Ameritrust (now part of KeyCorp) and Citicorp.
Susan E. Gould, CFA
Stout Risius Ross, Inc.
One South Wacker Drive
38th Floor
Chicago, IL 60606
Phone: 312. 752.3301
Fax: 312.857.9001
Email: sgould@srr.com
Education: J.L. Kellogg Graduate School of Management, Northwestern University
Northwestern University, BA, Political Science
Susan E. Gould is a Managing Director in the Valuation & Financial Opinions Group at Stout Risius Ross, Inc. Her
concentration is in ESOP and ERISA Advisory Services. Susan has over 15 years of experience valuing privately held
companies in a broad range of industries. Her valuations have been performed for a variety of purposes, including
fairness opinions, solvency opinions, Employee Stock Ownership Plans, estate and gift taxation, shareholder disputes,
purchase price allocation and corporate planning purposes.
Among the many industries Ms. Gould has served are manufacturing, printing, textile, chemical, construction,
printing, retailing, plastics, steel distribution, propane distribution, commodity trading, grocery stores, education,
petroleum products, architecture and engineering services, financial services, bank, steel products, prefabricated metal
storage buildings, marketing and public relations services, residential home building, computer electronics, insurance
and construction equipment.
Ms. Gould earned an MBA with a concentration in Finance and Economics from the J.L. Kellogg Graduate School of
Management at Northwestern University and a BA in political science from Northwestern University. Ms. Gould has
also earned the right to use the Chartered Financial Analyst (CFA) designation, and is a member of the CFA Institute.
Ms. Gould is a member of the ESOP Association, and is a member of the Valuation Advisory Committee of the ESOP
Association. She is also a member of the Illinois Chapter of the ESOP Association. Ms. Gould is a member of the
National Center for Employee Ownership and the Business Valuation Association of Chicago.