Assessing the Feasibility of an ESOP Presented by: Alexander L. - - PowerPoint PPT Presentation

ESOP Nuts and Bolts: What You Need to Know About Employee Stock Ownership Plans

Indianapolis, IN — August 16, 2018

Assessing the Feasibility of an ESOP

Presented by:

Alexander L. Mounts Krieg DeVault LLP One Indiana Square, Suite 2800 Indianapolis, IN 46204 317-238-6335 Amounts@kdlegal.com

Goals & Objectives

• Shareholder Liquidity / Diversification
• Can sell a portion or all equity to an ESOP
• Tax benefits (1042 for seller)
• Employee ownership culture
• Sharing wealth creation capability
• Employee Retirement plan
• Alignment of financial interests between owner &

employees

• Continuing legacy of business
• Strategic reasons
• “Friendly”, “patient” shareholder

Other?

Thinking about an ESOP?

2

• Closely held U.S. based company
• Company can be a C-corp or an S-corp
• At least 20 employees (companies with small

payroll bases may encounter problems under Code Sections 415 and 409(p)

• Profitable
• Debt capacity
• Stable earnings
• Supportive management

Good ESOP Candidates

3

Identified ESOP objectives

• Create and realize employee retirement benefits,

cultural improvements, and operational efficiencies

• Protect the shareholders’ legacy and Company

heritage while realizing liquidity

• Company desiring to utilize corporate tax savings to

increase growth and accelerate debt repayment

• Reward employees and management who helped

build the Company

Good ESOP Candidates

4

Strength of management team Capital constraints Culture

Business Considerations

5

Comprehensive review of the Company’s

• wnership structure, value and operating

dynamics Addresses and incorporates shareholder

• bjectives

Can be part of a larger ownership transition analysis Might include multiple scenarios Provides a path to implementation of desired

• utcome

What is a Feasibility Analysis?

6

Long-term look at the Company Determine whether a Company is a viable candidate for an ESOP Addresses different elements and potential hurdles of the transaction Analyze different transaction structures to determine the best result

Why Conduct a Feasibility Analysis?

7

Current ownership characteristics

• Family business lacking a “next generation,”

and/or looking to realize liquidity prior to transitioning management to family or non-family management

• “Diffuse” ownership group looking to consolidate

control and align interest in growing the Company

• “Segmented” professionals looking for a tax

efficient means of delivering employee ownership similar to a partnership

Why Conduct a Feasibility Analysis?

8

Valuation expectations

• ESOPs cannot pay more than fair market

value

• Is the valuation expectation -
• Realistic given current M&A market dynamics
• Supported by past Company performance?
• Based on defendable Company projections?
• Reflective of broader industry trends?

Shareholder Expectations

9

Liquidity requirements

• Most ESOP transactions require the seller to

receive a note (the “seller note”) as partial payment for their stock

• Sources of payment: cash vs. seller note
• Seller Notes
• Determine total return through note structure

(term of note, cash interest, warrants, etc.)

• Seller can be a more “flexible” creditor than

traditional lenders

Shareholder Expectations

10

Post-closing governance Involvement in the business post transaction

• “Control” at the Board of Directors Level
• “Control” at the Management Level

Preservation of the:

• Shareholders’ legacy
• Company/Community jobs
• Presence/Status in the geographic or industry

community

Shareholder Expectations

11

Company providers

• Historically an “Exploratory Committee”

reviewed the possibility of an ESOP transaction

• The Trustee will not use a valuation

advisor for a transaction that has previously performed work – including but not limited to a “preliminary valuation” – for

• r on behalf of the ESOP sponsor

Conflicts of Interest

12

Who are the Sellers? Who is the Trustee? Participation in the business vs. absentee

• wners

Development of projections/financials on which the valuation is based

• Historical financials
• Quality of Earning’s Analysis
• Basis for projections

Conflicts of Interest

13

Review of projections/determining reasonableness of projections

• Comparison to historical results
• Comparison to comparable companies’ historical results
• Industry review and evaluation of projected company vs.

market growth

• Impact of recession on historical results and implied

potential impact on projections

• Accounting for anticipated capital expenditures, both cash
• utlay and anticipate return on investment
• Use of cash and impact on the Company’s working capital

Valuation Considerations/Evaluations

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Contemplating transaction structure/identifying drivers Understanding risks and rewards of various transaction structures Preparing for a Transaction

15

Clean up financials Understand other opportunities

• Impact of other valuations/letter of intent
• Exploring third party buyers prior to/coincident

with ESOP transaction

Organize company records Legal clean up

• Legal diligence and how to prepare

Begin conversations with existing banking relationships to determine level of interest

Preparing for a Transaction

16

Management evaluation

• Sellers need to evaluate management

teams and succession plans

Tools to drive performance

• Long Term Incentive Plans (LTIP)
• ESOP communications

Build/Secure the Management Team

17

Inform advisors of long term plans and goals so that they can be incorporated into the transaction strategy Impact of Personal Planning Decisions

18

Questions ?

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Alexander L. Mounts Krieg DeVault LLP One Indiana Square, Suite 2800 Indianapolis, IN 46204 317-238-6335 Amounts@kdlegal.com