Www.BeaconHillAdvisory.com B.O.S.S Workshops (Business Owner Strategy Sessions) Maximize Company Sale Value Clint Edgington, CFA Mark Fissel, RFC.

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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

[email protected]

Ohio Employee Ownership CenterKent State University113 McGilvrey Hall

Kent, OH 44242www.oeockent.org

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