Webinar: Employee ownership transitions versus private equity roll-ups

1 1

Succession Planning: Worker Ownership and Roll-Ups

August 3, 2017

For Purchasing Co-‐op Member Companies: Understand employee ownership succession

and private equity roll-‐ups

© Project Equity and Castle Wealth Advisors 2017

2 2 © Project Equity and Castle Wealth Advisors 2017

INTRODUCTIONS

Bryan Munson NCBA-‐CLUSA

Gary Pi9sford, CFP®

Castle Wealth Advisors, LLC

Alison Lingane

Project Equity

Lance Rantala

BLUE HAWK


AGENDA

1. Recap of Webinars Part 1 and 2

2. Employee ownership succession

3. Private equity roll-‐ups 4. Q&A


1. RECAP OF WEBINARS PARTS 1 AND 2


RECAP PART 1: Understanding Succession OpNons

SUCCESSION OPTION

KEY POINTS

GOOD FOR CO-‐OP?

Close down

•  Last resort •  Lose enterprise value ✗

AcquisiNon •  Sale outside the co-‐op •  All cash is good for seller •  All stock is not good for seller

✗ Sell to family

•  Good long term plan •  Financially good for parents and children •  Need to groom management

✔ Sell to another member

•  All cash sale is good for seller •  Seller is secure ✔

Employee ownership •  ESOP •  Worker coop

•  Good for employees •  Good for seller, potenUal tax breaks •  ESOP is more expensive b/c highly regulated •  Requires leadership succession

✔ Webinar recording available at: https://www.youtube.com/watch?v=f3_Gp0nqRwI


RECAP PART 2: Selling to Family & Selling to Other Purchasing Co-‐op Members

We covered:

•  Selling to Family

•  Selling to another purchasing co-‐op member

•  Benefits of an established business

•  Changing tax laws in 2017 or 2018

Webinar recording available at: https://www.youtube.com/watch?v=FFwhiwMTG_M


2. EMPLOYEE OWNERSHIP SUCCESSION


Why sell to employees?

ü  Receive market value for your company

ü  PotenUally significant tax advantages ü  Protect legacy of your business ü  Retain jobs


Employee Ownership CooperaNves

Worker-‐ Owned Coops

Stock grants

Housing Coops

Purchasing Coops

Consumer Coops

You’ve got opNons! Employee Ownership structures

Perpetual Employee Trusts

ESOPs


You’ve got opNons! 4 Employee Ownership structures

Worker co-‐op

DemocraNc

ESOP

ESOP

Perpetual Employee Trust

100% employee ownership ✔ ✔ SomeUmes ✔

Direct Employee Share Ownership ✔ No No No

Built in Profit-‐Sharing ✔ Recommended SomeUmes ✔

DemocraUc governance ✔ ✔ No ✔

Annual valuaUon required (ERISA / DOL regulated) No ✔ ✔ No

Suitable company size? All sizes Large Large Medium to Large


ESOP example: Van Meter Industrial 100% employee owned since 2005

•  90-‐year-‐old electrical supplies distribuUon company •  450+ employees in 15 branches across midwest


ESOP example: Van Meter Industrial 100% employee owned since 2005

When you work with a team member at Van Meter, you’re not just working with an employee

—you’re working with an owner. An owner who’s empowered to make decisions, create

solu6ons and do what’s right for your business. Because we know that when our customers

succeed, we succeed.

“

”


ESOP -‐ Employee Stock Ownership Plan Overview

•  All or a porUon of the company’s shares are held in a trust on behalf of the employees

•  ReUrement benefit, regulated by ERISA / DOL

–  Qualified defined-‐contribuUon employee benefit plan designed to invest primarily in the stock of the sponsoring employer

•  PotenUally significant federal tax benefits at >30% of stock held by the ESOP

•  High set up and ongoing costs

•  Financed, employees don’t pay for the business


Worker-‐owned cooperaNve: New Era Windows 100% worker-‐owned since 2012 •  Windows manufacturer based in Chicago, IL •  ~ 20 employees


Worker-‐owned cooperaNve: New Era Windows 100% worker-‐owned since 2012

ConDnuing the great tradiDon of American Manufacturing, New Era Windows is owned by the same workers who skillfully produce every window that comes out of the factory. This means that the details at each stage of manufacturing are handled

with sincere care and deep pride, and that you won’t find a beKer window out there for anywhere

near the value we can offer.

“

”


Worker CooperaNve Conversion

•  Business owned and governed by their workers –  100% employee ownership, high employee engagement –  Board of Directors made up of majority worker-‐owners –  Profit-‐sharing via patronage, based on hours worked

•  Flexible business form (Co-‐op Corp, LLC most common)

•  PotenUal significant federal tax benefits

•  Lower cost set up and ongoing

•  Financed: employees buy in with a small % of equity


The business pay for itself out of future profits Worker co-‐op example

Who provides % of financing

Senior debt Bank CDFI

30-‐50%

Subordinated debt Seller CDFI

Seller: 20-‐50% Other: 10-‐50%

Preferred, non-‐voNng equity

Investors Can be used in place of subordinated debt in worker co-‐op

Common, voNng equity

Worker-‐owner voUng shares (equity buy-‐in)

0-‐10%

•  TransacUon is typically debt-‐financed •  Seller holds a note •  Employee equity buy-‐in is a small %


•  Financial feasibility •  Employee interest •  Assess leadership transiUon opUons

•  Timeline and roadmap

•  Plan leadership transiUon

•  Sales agreement •  Financing •  Set up ownership structure

•  Employee educaUon

•  Execute sales agreement

•  Close financing •  Finalize bylaws and governance

DECISION TO PURSUE FORMAL COMMITMENT SALES TRANSACTION

Assess Prepare Convert

6 to 18 months

Assessing succession through employee ownership


3. PRIVATE EQUITY ROLL-‐UPS


Private equity roll-‐ups

•  The offering price looks higher – BUT

•  More stock in new company = more risk

•  To unwind is very expensive

•  Timing is very important


Join us Oct. 4-‐6 in Washington D.C. for NCBA-‐CLUSA’s 2017 Co-‐op IMPACT Conference

þ  Part 1: Succession Planning: How to Engage Members in Their Future

þ  Part 2: AcquisiUon & Selling to Family þ  Part 3: Employee Ownership & Roll-‐ups

q  2017 Co-‐op IMPACT Conference: Oct. 4-‐6 in D.C.


QUESTIONS?

Gary Pi9sford, CFP® President and CEO Castle Wealth Advisors, LLC [email protected] 317-‐849-‐9559

Bryan Munson Manager, Business Development NCBA-‐CLUSA [email protected] (202) 471-‐0900

Alison Lingane Co-‐founder Project Equity alison@project-‐equity.org 510-‐684-‐6665

Lance Rantala CEO BLUE HAWK [email protected] 773-‐525-‐7200


APPENDIX


You’ve got opNons! 4 Employee Ownership structures

Worker co-‐op

DemocraNc

ESOP

ESOP

Perpetual Employee Trust

100% employee ownership ✔ ✔ SomeUmes ✔

Direct Employee Share Ownership ✔ No No No

Built in Profit-‐Sharing ✔ Recommended SomeUmes ✔

DemocraUc governance ✔ ✔ No ✔

Annual valuaUon required (ERISA / DOL regulated) No ✔ ✔ No

Suitable company size? All sizes Large Large Medium to Large


Worker-‐Owned CooperaNve

•  ADD VISUAL

Graphic from Democracy at Work InsUtute


Worker-‐Owned CooperaNve

•  A business owned and governed by its workers –  100% employee ownership, high employee engagement –  Board of Directors made up of majority worker-‐owners –  Profit-‐sharing via patronage, based on hours worked

•  Employee stock does not appreciate •  RelaUvely inexpensive to set up •  PotenUal tax breaks to seller at transiUon (if is a sale) •  Financed; employees pay small equity buy-‐in •  Fit for any size company


ESOP: Employee Stock Ownership Plan



ESOP: Employee Stock Ownership Plan

•  All or a porUon of the company’s shares are held in a trust on behalf of the employees

•  No built in profit sharing or employee governance

•  ReUrement benefit, regulated by ERISA / DOL –  High set up and ongoing costs; annual valuaUon required

•  Employee shares appreciate / depreciate (value goes up / down as company valuaUon changes)

•  PotenUal tax benefits to FSP if structured as a sale •  Tax benefits to company (and its employee owners)


DemocraNc ESOP

•  UUlizes ESOP structure –  Tax advantages to the company (and therefore its employee /

community owners): 100% ESOP S-‐Corp pays no corporate income tax

•  With representaUve democracy at the board level •  And employee parUcipaUon in elecUng Plan Trustees and on Trustee Commitees



DemocraNc ESOP or Perpetual Employee Trust

•  DemocraUc ESOP uUlizes ESOP trust structure •  Tax advantages to the company (and therefore its

employee / community owners) –  100% ESOP S-‐Corp pays no corporate income tax

•  Perpetual Employee Trust is not an ESOP –  “Perpetual” employee-‐ownership

•  RepresentaUve democracy at the board level

•  Employee parUcipaUon in elecUng Plan Trustees and on Trustee Commitees


Financing example: Island Employee CooperaNve


Financing example: Island Employee CooperaNve

Debt

Senior Lenders $3,600,000

Seller (Sub.) $1,500,000

Inventory loan $500,000

Total Sources $5,600,000

Purchase of Business $4,250,000

Inventory $930,000

Working Capital and Technical Assistance

$290,000

Closing Costs $130,000

Total Uses $5,600,000

Equity 1%

Senior Debt 63%

Sub. Debt 26%

Inv. 10%