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ESOP Solutions provides independent business succession consulting services to owners of closely held businesses and focuses on the use of Employee Stock Ownership Plans (ESOPs) to accomplish the following objectives:
The Problem. Owners of closely held businesses face a difficult tax scenario when they decide to diversify their personal wealth or transition the ownership of their company. A common scenario is an owner who would like to diversify his/her personal wealth or transition the company to family or a management group. The problem is that these groups seldom have the funds to purchase the stock outright. As an alternative, many owners investigate the ability of the company to "fund" the transition by either redeeming the owner's shares or bonusing dollars out to family or management to provide them with the funds to purchase. Due to various levels of federal and state taxation, on average such a scenario will cost the company $3 in revenue for every $1 received by the owner net of tax. It is easy to see that such a scenario creates significant cash flow issues for the company.
The Solution. How does such a business solve, what is referred to as, the "3 for 1" problem? One increasingly popular method is to use the tax benefits of an ESOP to facilitate the transition of ownership. By using an ESOP, the scenario is structured to allow $1 of company revenue to flow through to the owner untaxed. Therefore, the 3 for 1 problem has become a 1 for 1 solution. By solving the problem, the company's cash flow issues are eased and the company can afford to purchase the owner's stock. Therefore, allowing the shareholder to diversify his wealth and provide a smooth transition of management succession.
What are the Motivations that Prompt The Use of an ESOP?
What are the Tax Incentives Created by an ESOP Transaction?Shareholder Tax Incentives
Company Tax Incentives
Employee Tax Incentives
Key Management Tax Incentives
What if your company could take a loan from a bank (perhaps to fund expansion or facilitate ownership succession to a key management group or family members) and the repayments of the loan principal were tax deductible?
What if the proceeds of this loan could be used to buy a portion of your stock ownership in the company and you didn't incur any tax liability?
What if such a sale did not require you to give up control of your company in the process?
Finally, what if your S corporation could become a "tax-exempt" entity?
If any one or all of these scenarios is appealing, you should probably be investigating an ESOP.
Candidate Characteristics The following highlights some positive characteristics:
$1,000,000 Average EBITDA
C or S corporation (or the willingness to create or convert to a C or S corporation)
$1,000,000 in Compensation Expense
Stable and Established Business (highly cyclical companies are not good ESOP candidates)
Strong Management Team (or the need and willingness to create a strong team)
ESOP Solutions conducts an initial feasibility study for its clients. The goal is to test the client's data against proven criteria to determine whether it is worth the client's time, energy and money to investigate a tax advantaged ESOP business solution. Owners/Managers of closely held businesses cannot waste time and money to investigate possible tax saving ideas unless there is a good likelihood that the transaction will work for their business. ESOP Solutions is sensitive to this issue and that is why each client's data is initially screened using proven criteria to give the client an initial view of whether there are any significant barriers to entry for an ESOP transaction. ESOP Solutions charges a minimal fee for initial feasibility and will quickly provide the client with a short memorandum describing the feasibility testing results and the issues that could affect the transaction. If an ESOP is not the correct strategy for a particular client, ESOP Solutions will provide the client with alternative strategies that may be more effective for their situation. If no barriers exist, ESOP Solutions will provide the client with a proposal for a complete ESOP business solution.
Phase I: ESOP Structural Planning
Realizing that an ESOP is one of the most important transactions in the lifecycle of a closely-held business, ESOP Solutions strives to provide a timely and cost-effective result. Each ESOP proposal is divided into four phases that correspond to the ESOP implementation timeline. The first phase of an ESOP implementation is the creation of an initial transaction structure. In this phase, we work closely with the company and shareholder(s) to create an ESOP structure that will satisfy all of their needs. We generally call this Phase I planning.
Phase II: Financial Planning And Implementation
Independent Valuation. The ESOP valuation is perhaps the most important piece of an ESOP implementation and therefore is not a place to go bargain hunting. Although ESOP Solutions does not provide independent valuation opinions, it does utilize some of the best ESOP valuation firms in the industry. Early in the process, we will introduce the client to one of our valuation firm strategic team members who will provide us with an initial idea of the value of the transaction so that we can create an ESOP business solution proposal. This valuation firm generally is engaged by the client's ESOP exploratory trustee committee and is paid as a part of ESOP Solutions' complete fee arrangement. Selling Shareholder Financial and Estate Planning. Realizing that an ESOP must integrate seamlessly with the selling shareholders' financial and estate plan, the experienced professionals at ESOP Solutions conduct a thorough review and update of the financial and estate plan for each selling shareholder. As a result, ESOP Solutions makes certain that the ESOP transaction enhances the complete financial picture of each seller. In addition, ESOP Solutions has experience in integrating estate planning tools such as family limited partnerships and charitable remainder trusts into the total ESOP transaction structure. Â§1042 Proceeds Reinvestment Professional. The proceeds of an ESOP sale are a unique asset to a selling shareholder. To maximize the tax advantage of the transaction, the selling shareholder must reinvest the proceeds carefully. To do this, the selling shareholder will need an experienced ESOP investment manager. ESOP Solutions works with the best Â§1042 qualified investment managers in the business. At the beginning of a transaction, ESOP Solutions will provide the client with an analysis of their personal financial position and suggest a variety of strategies for maximizing return without triggering capital gains liability. Many clients make the mistake of employing an inexperienced investment manager and are forced to live with the results. We make sure that our clients get the absolute best representation to make certain that they receive the exact benefits that they are anticipating from the ESOP transaction. Facilitate ESOP Financing. Depending on the needs of our clients, ESOP Solutions can provide a variety of services to enable the client to assess and successfully obtain financing for the ESOP transaction. The services we provide include preparing financing memoranda for financial institutions, structuring the debt, and the negotiation and comparison of credit facility proposals. Our experience in the financial markets provides us with the ability to negotiate for our clients to obtain the best loan terms at the least cost. In addition, our network of ESOP-savvy lending professionals allows us to get an answer in a fraction of the time that it takes just to get an inexperienced lender up to speed.
Phase III: Transaction Documentation And Closing
Legal Representation and Document Production. Depending on the complexity of an ESOP transaction, it may take several attorneys to complete a transaction. The only way to keep legal fees from taking over the transaction is to work with a law firm that has experienced ESOP professionals who spend the majority of their time providing ESOP transaction representation. ESOP Solutions uses Womble Carlyle Sandridge & Rice to provide ESOP representation to ESOP Solutions and our clients. With over 400 attorneys in eight offices across the midAtlantic and Southeast regions, Womble Carlyle is one of the largest and most experienced ESOP legal advisors in the country. Unlike most law firms that provide occasional ESOP representation, Womble Carlyle has an ESOP Business Planning Group with attorneys who spend most, if not all, of their time providing legal representation to ESOP companies, trustees, financial institutions and service providers. Womble Carlyle's experience and size allows it to provide cost-effective legal representation for our ESOP clients. Sale Transaction Closing. The entire ESOP transaction is focused on the sale of stock by the selling shareholder to the ESOP Trust for the benefit of company employees. ESOP Solutions organizes and monitors each ESOP transaction to ensure that the transaction is completed on time and within budget. Many ESOP transactions become convoluted and disorganized due to the lack of one central organizer: a quarterback. This lack of organization causes increased professional fees and delays in closing. ESOP Repurchase Obligation Analysis and Funding Alternatives. Since the company must eventually repurchase the stock distributed to employees from the ESOP, it is imperative for the company to plan for the cash needs of the future employee distributions. ESOP Solutions treats this future obligation as a cost of the ESOP transaction and factors it into both feasibility and transaction structuring. ESOP Solutions provides our clients with a 20 year ESOP cash flow analysis of the repurchase liability. In addition, ESOP Solutions provides the company with several strategies to prefund a portion or all of this future liability. Advance planning enables the company to use tax advantaged prefunding vehicles so that the final distributions do not adversely affect the future cash flow of the company.
Phase IV: Life After The ESOP Sale
ESOP Rollout and Employee Communication. ESOP Solutions does not disappear after closing and rollout of the ESOP, but is committed to being a partner with the new ESOP company to provide them with advice and experience as needed throughout the life of the ESOP. The benefits of an ESOP are not exclusively tied to tax incentives. Instead, there is tremendous opportunity to create operational benefits through the creation of an employee ownership business culture. The creation of this type of culture takes time and patience, but also experience. Employees must be educated before they can be motivated by their new stake in the company. ESOP Solutions provides proven techniques for rolling out the ESOP to employees in a manner that educates the employees and, therefore, allows the company to motivate them toward higher profits and corresponding increases in share price. ESOP Recordkeeping and Compliance. Not all ESOP recordkeepers are the same. Through our network of experienced ESOP recordkeepers, ESOP Solutions provides our clients with several referrals and monitors the entire process so that the transaction and plan stay in compliance with the requirements of both ERISA and the Tax Code. ESOP Mergers & Acquisitions Advisory Services. Because a properly implemented and structured ESOP produces both cash flow benefits and operational benefits, many ESOP companies find the need to make acquisitions of other companies or may themselves become the target of strategic buyers. Acquisitions Guidance. ESOP Solutions is experienced in guiding its ESOP clients through the process of acquiring other companies either outright or through the use of their ESOP. With the help of ESOP Solutions, our clients can aggressively negotiate a purchase by using their ESOP to provide selling shareholder(s) taxfree treatment. ESOP Solutions also provides advice regarding fiduciary and tax issues inherent in these transactions. Sale Guidance. A great ESOP myth is that an ESOP will preclude the company from ever being sold. ESOP companies are attractive purchases for strategic buyers due to their outstanding financial performance and employee morale. ESOP Solutions simplifies this sale process by providing guidance with regard to structuring the transactions to avoid fiduciary issues and ERISA/Tax Code limitations.
So What Is The First Step?
The first step is to fill out our feasibility questionnaire. Mail, fax (704-338-7821) the completed questionnaire to ESOP Solutions and we will provide you with an initial feasibility analysis.