What Are Your Ow nership Transition Alternatives? The importance of - - PowerPoint PPT Presentation

What Are Your Ow nership Transition Alternatives?

The importance of planning in advance for succession

Stephanie Carlin, Vice President Prairie Capital Advisors Salina, KS Anne-Claire Broughton, Principal Broughton Consulting Durham, NC

About Us

Stephanie Carlin, ASA

• Vice President, Prairie Capital Advisors, Inc.
• Provides closely-held business owners with an

understanding of the value of their business and the

• ptions available to them when they are considering
• wnership transition.

About Us

Anne-Claire Broughton

• Principal, Broughton Consulting
• Business succession via employee ownership & open

book management coach with Great Game of Business

• Co-Founder and Interim Executive Director of North

Carolina Employee Ownership Center (NCEOC)

Succession Planning

• A plan for someone to either own or run your

business after you leave (voluntarily or involuntarily)

• More than half of all small business owners do

not have a succession plan

• If they have to leave in a hurry due to illness or
• ther factors, the business will likely suffer and

potentially not survive in the absence of the

• wner

8 Key Questions to Ask Yourself

When selling a business, there are a number of factors, both economic and non-economic, that can impact the seller’s decision.

Determining Goals & Objectives

Ow ner Transition Paths

These paths move

• wnership in very

different ways; however, each has its pros and cons

Strategic Buyer

• A buyer already in the industry or in a similar

industry, are usually willing to pay more because they can take advantage of synergies with their existing business by eliminating costs and redundancies in operations after closing

• The premium strategic buyers are usually willing

to pay comes at a cost

Private Equity

• Typically will not pay as much as a strategic buyer

but can pay a relatively high value

• PE firms are buying the business as a going

concern and covets the facilities, the management team and the operations as a base for further growth

• Opportunity for a “second bite of the apple” for

seller

Ow nership Transition Paths

Family Transfers

Tax Cuts and Jobs Act (TCJA) became law on December 22, 2017 and effective 1/1/2018. For individuals, the rates expire on 1/1/2026 and reverts back to prior rates unless Congress extends them. Estate and Gift limits (2020) – Individuals can exempt up to $11.58M Couples can exempt up to $23.16 million, (Amounts adjust annually for inflation) Gift tax return – any gift over $15,000 per tax year (as of 2020) requires you to file Form 709 and count against lifetime exclusion (annual limits adjust annually for inflation) Spousal limits – there is an unlimited marital deduction to transfers to your spouse, so long as the spouse is a U.S. Citizen. Non-citizen spousal limits are ~$157k.

Recapitalization

While there are many applications for the use of a recapitalization, the primary applications are:

• Equity redemption either to take out a shareholder or for

liquidity for all shareholders

• Dividends to provide liquidity for shareholders and diversify

assets and reduce risk

• Non-optimal timing for company sale, but liquidity event still

desired

• Share risk and attract capital for more growth
• Prepare the Company for a sale by adding institutional investors

Ow nership Transition Paths

Why Consider Employee Ow nership?

• Preserve legacy, jobs, community impact
• Reward employees who helped build the

company

• Potential beneficial tax treatment
• Employee owned firms with strong ownership

cultures perform 8-10% better and have greater employee retention rates

Considerations for Selling to Employees

• Company is privately owned
• Company is consistently profitable with good cash

flow

• Management team and operations are strong
• Selling shareholders wish to preserve legacy and

reward employees

• Experienced advisors are available
• OBM/GGOB is a big advantage

Types of Employee Ow nership

• Management Buyout (MBO)
• Employee Stock Ownership Plan (ESOP)
• Worker Cooperative
• Newer forms such as perpetual

trust/employee ownership trust (EOT)

Employee Ow nership Stats

• 7,000 ESOPs in U.S. with 14 million

participants

• Close to 400 worker cooperatives in the U.S.

with about 6,700 participants

• More than 9 million employees hold stock
• ptions, stock appreciation rights, restricted

stock, or phantom stock

• Handful of EOTs

Management Buyout

• Keeps ownership within the “business family”
• Offers a high level of control
• Preserves the corporate culture, enabling you to

reward your most valued and trusted employees

What is an ESOP?

• An employee benefit plan (regulated by

ERISA) which can set aside or borrow funds to buy the departing owner’s shares of company stock.

• These shares are put in a trust and allocated

to individual employee accounts that vest

• ver time and eventually are cashed in when

employees retire or leave the company.

ESOP Considerations

• Tax advantages for owner selling to ESOP
• 100% ESOP owned S Corps are tax exempt
• Payments made to ESOP are tax deductible
• Can boost company performance, especially if

combined with some form of participatory management

• Best suited for companies with 20 or more employees

and strong cash flow

• Highly regulated with significant administrative costs,

including annual valuation

Ow nership Transition Paths

What is a Co-op?

• A worker co-operative is a business entity

(corporation, LLC, trust) owned and controlled by its members

• Governed by bylaws that address how

members join or leave the co-op and how profits are distributed

• Operates on the principal of one member, one

vote

Co-op Considerations

• Potential tax advantages for selling to co-op
• Can be a good fit for smaller companies (fewer than

20 employees)

• Fewer administrative hurdles than an ESOP (no

annual valuation, etc.)

• Works well with highly motivated employees who

know the business

• Democratic structure
• Cost to employee to buy in (can be deducted from

paycheck)

What is an Employee Ow nership Trust (EOT)?

• A relatively new form of employee ownership

common in the UK

• A trust holds shares of the company on behalf
• f the employees, who participate in annual

profit sharing

• Unlike an ESOP, an EOT is not a retirement
• plan. Employees are part of profit sharing

ONLY during their employment tenure

Employee Ow nership Trust Considerations

• Allows company to remain employee owned in

perpetuity if desired

• Flexible, not regulated by ERISA
• Low administrative costs, no annual valuation
• No favorable tax treatment
• Current profit sharing rather than payout at

retirement as done in an ESOP

• Allows for (but does not require) democratic

governance similar to a co-op

• Relatively untested

Steps to EO Conversion

1. Learn about ESOPs, co-ops, perpetual trusts 2. Talk to other established business owners who have gone through a similar transition 3. Conduct a feasibility study 4. Conduct a valuation 5. Hire an attorney to draft the plan 6. Obtain funding for the plan 7. Hire a trustee if needed; draft communications plan for employees 8. Consider open book management

Ow nership Transition Alternatives

Sometimes, the best decision is to do nothing… Really? Nothing?

Ow nership Transition Alternatives

Holding on while building value may be an alternative

• Depending on shareholder objectives, not exiting at the

current time may be the right alternative

• Bigger payday; right timeline for the business; right timeline

for potential buyers

• While holding on, you should Focus on value drivers
• Both internal and external

While holding on, you should build value

• Focus on value drivers
• Both internal and external

You may not have control over drivers, and there are negative drivers to value!

Preparing the Business

Questions?

Stephanie Carlin, ASA Vice President Prairie Capital Advisors scarlin@prairiecap.com 785.452.2919 Anne Claire Broughton Principal Broughton Consulting, LLC anneclaire@broughton-consulting.com 919.306.2090