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www.BeaconHillAdvisory.com
B.O.S.S Workshops(Business Owner Strategy Sessions)
Maximize Company Sale Value
Clint Edgington, CFAMark Fissel, RFC
Roy MessingOhio Employee Ownership Center
Kent State University113 McGilvrey Hall
Kent, OH
Beacon Hill Investment Advisory Columbus, Ohio
March 18, 2010
OutlineOverview of Reasons for Employee
OwnershipManagement Buyout vs. Employee BuyoutRecognizing Good Candidate Companies
for Sale to EmployeesESOPs vs Employee-Owned Coops
CostsProvisions
Steps for an Employee Buyout
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Uses of Employee OwnershipOwner Driven
Succession PlanningCompetitiveness StrategyTax Advantaged Corporate Financing
Employee DrivenAverting a Plant ShutdownSecuring Job and Career
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Reasons for Employee Ownership
(multiple reasons possible) averting shutdown or major job loss 5%ownership succession 58%divestiture of plants & divisions 11%blocking a takeover or purchase by another company
6%financing expansion of company 10%reducing borrowing costs 15%replacement of another benefit plan 10%additional benefit plan 35%philosophical commitment to employee ownership
44%
Source: Real World of Employee Ownership (2001)
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Management Buyout vs. Employee Buyout via ESOP or Coop
Common Characteristics:Buyers have small amount of funds available Buyers must use borrowed fundsAssets of company used as collateralFuture cash flows of company used to repay
debt
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Management Buyout vs. Employee Buyout via ESOP or Coop
Management ESOP/Coop
Buyers Key Managers All Employees
Tax Incentives None SeveralSale or Gift Sale Gift
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--NO! –It’s a Sale!
Recognizing Good Candidate Companies for Sale to Employees
Profitable business
No family members involved in the business
Employees see jobs as worth having and business as worth owning – high seniority
Owner and employees regard each other as “family”
Owner has 3-7 years to implement ownership succession
Partnership between owner and employees for this period is seen positively by both
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Recognizing Good Candidate Companies for Sale to EmployeesOwner willing to sell to employeesCapable management succession
team in placeAssets available to serve as collateralFuture cash flows are predictableCompany has ability to handle additional
debt likely it can obtain financingSufficient time available to do the
transaction
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Recognizing Good Candidate Companies for Sale to EmployeesNumber of Employees:
30 ESOP can usually be justified
20-30 depends on the specific situation
< 20 ESOP very difficult to justify, Employee-Owned Coop moreappropriate
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Set Up Costs ESOP EO
CoopAttorney $20,000 $20,000Valuation 8-12,000 6-10,000Trustee – External 10-25,000 N/ATrustee – Internal -0- N/AAdministration -0- N/A
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Ongoing Annual Costs ESOP EO
CoopAttorney $5-10,000 $5,000Valuation 5-8,000 -0-Trustee – External 10-25,000 N/ATrustee – Internal -0- N/AAdministration 4-7,000 N/A
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Lesson re CostsKISS
Simple Plan Lower Costs
Complex Plan Higher Costs
Coops are less expensive than ESOPs Coops are preferred for companies with < 20
employees
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ESOP vs. CoopESOP EO Coop
Protected by ERISA Yes No
Capital Gain Tax Deferral Available to Seller for Sale to Employees (1042 Rollover) Yes Yes
Transaction Valuation Required Yes Yes
Annual Valuation Required Yes No
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ESOP vs. CoopESOP EO Coop
1 Vote = 1 Share 1 Person
Voting on Normal Issues Trustee, Direct Direct is optional
Voting on Major Issues Direct Direct
Board Selection/Election Many Majority must be
methods are elected byacceptable members
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ESOP vs. CoopESOP EO Coop
Employee Payment Not usually Yes
Membership Fee $-0- $300-30,000
Membership Optional? Automatic if eligible Yes, not required
Normal Payment of While employed, Ownership Benefit After Termination 8-15 Year Cycle
Payment to Employee Valued at Fair Market Value Book Value
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ESOP vs. CoopOwnership of < 100% of company:
ESOP: Any % ownership is viable long-term
Coop: Only 100% ownership is viable long-term Company is either a coop or it’s not – can’t be a
partial coop
Coop: HOWEVER, < 100% ownership is acceptable during transition period of Coop being in process of purchasing 100%
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ESOP Tax Incentive for SellerSale to Management
or Outside BuyerProceeds
$1,000,000Capital Gain 1,000,000Capital Gain Tax @ 15% 150,000Net to Seller 850,000
Sale to Employees
through ESOP$1,000,000
1,000,000
-0-1,000,000
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ESOP Tax Incentive for Company
Sale to Management
or Outside Buyer
ESOP Loan $1,000,000
Principal Repayment 1,000,000
Tax Deductible? No
Tax Deduction @ 34% -0-
Net Loan Cost 1,000,000
Sale to Employeesthrough ESOP
$1,000,0001,000,000
Yes340,000660,000
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Why Sell to an ESOP?
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Sale to Management
or Outside Buyer
Selling Price $1,000,000
Tax Savings: Capital Gains Tax
-0- Principal Deduction
-0-
Total Tax Savings -0-
Sale to Employees
through ESOP
$1,000,000
150,000
340,000
490,000
Transaction RealityThe tax incentives available to an ESOP and
Employee-Owned Coop often make the transaction “doable” that without the tax incentives is not “doable”.
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Time RequiredRetiring Owners may “percolate” the idea
for years before deciding to implement the Succession Plan
Typical time required to implement:ESOP: 6-9 monthsCoop: 4-6 months
Quickest time seen:ESOP: 10 weeksCoop: 4 months (limited experience)
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Steps for an Employee BuyoutEducate seller & key employees about
ESOPs and/or Employee-Owned CoopsAlert parties, especially seller, to fiduciary
responsibilityObtain “ballpark estimate” valuation of
businessNo sense continuing if valuation is
unacceptable to selling ownerEstablish buyout committeeConduct preliminary feasibility studyEducate employees about buyouts
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Steps for an Employee Buyout (cont’d)Prepare business planObtain final business valuation for
transactionNegotiate sales agreement with sellerDevelop & approve official ESOP or Coop
Plan documentsArrange financingClose deal & celebrate!
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Employee Ownership SummarySignificant tax advantages
Flexibility
Employee Ownership + Ownership Culture linked to improved company performance
Successful succession planning
Not suitable for all circumstances
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Contact Information Roy Messing
Ohio Employee Ownership CenterKent State University113 McGilvrey Hall
Kent, OH 44242www.oeockent.org
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