Download - Employee Stock Onwership Plan (ESOP) Buyouts
ESOP Buyouts
Business Succession Planning Seminar
November 5, 2014
John WalchCallister Nebeker
& McCullough10 East South Temple, Suite 900
Salt Lake City, UT 84133
(801) 530-7327
ESOP Buyouts
“Lee S. McCullough”Fictional Owner of
McCullough Enterprises, Inc.
ESOP Buyouts
Gross Proceeds $10,000,000
Less: Basis -100,000
Taxable Proceeds $9,900,000
Less: Federal Tax (23.8%) -2,356,200
Less: Utah Tax (5%) -495,000
Net Proceeds $7,048,800
Typical Sale of Business Transaction
ESOP Buyouts
Non-ESOP ESOP
Gain on Sale $9,900,000 $9,900,000
Income Tax (28.8% Combined state and federal tax rate) 2,851,200 0
Net After Tax Proceeds $7,048,800 $9,900,000
Additional Proceeds From ESOP Sale $2,851,200
Annual Income (5% return) $142,560
Assumed Life Expectancy 21 years
PV of Additional Annual Income (5%) $1,869,978
1042 Rollover Benefit $2,851,200
Reinvestment Benefit $1,869,978
Total Additional Lifetime Benefit $4,721,178
Assumes 20% capital gains rate, 3.8% Net Investment Income Tax and 5% Utah state tax rate
ESOP Buyouts
What is an ESOP?
• Employee Stock Ownership Plan• Qualified plan, like a 401(k) or profit sharing plan• Subject to standard ERISA and Tax Code requirements for all
qualified retirement plans.• Exception for diversification requirement of ERISA.• Requires stock appraisal annually and on every purchase or
sale of stock.• Repurchase liability for repurchasing stock from terminated
employees.
ESOP Buyouts
What sort of companies can set up an ESOP?
1. Must be a corporation, but can be a holding company.2. Stable revenues and expenses, to ensure loan repayments.3. At least 20 employees, since deduction limit is based on
total covered employee compensation.4. C corporation required for 1042 Rollovers.
ESOP Buyouts
How does an owner sell the company to the ESOP?
1. Company establishes an ESOP and ESOP trust.2. ESOP borrows $$ to acquire stock from owner(s).3. ESOP buys stock from owner
• At least 30% to qualify for 1042 Rollover• Independent Fiduciary and FMV appraisal required
4. Owner buys qualified “replacement property.”5. Company makes contributions to pay down ESOP debt.6. As debt is repaid, stock is allocated to participant accounts.
ESOP Buyouts
Advantages to Company:
• ESOPs may borrow money, and contributions used to repay loan are deductible both principal and interest.
• Can buy stock from disqualified persons• Contributions are deductible up to 25% of covered payroll,
plus dividends on ESOP stock used to repay loan.• Contributions may be stock, cash or a combination.• ESOP distributions may be taxed at capital gains rates.• Shelters company income from taxation (make S election).• Company officers are trustee(s), controlling ESOP stock.
ESOP Buyouts
Section 1042 Rollovers for selling owner:
• Owner sells at least 30% of outstanding company stock.
• Within 3 months before and 12 after the ESOP transaction, invests proceeds amount in any security issued by a domestic (American) corporation other than the company sponsoring the ESOP.
• Basis transfers to new securities, with no income tax due.
• May have multiple ESOP – owner transactions, allowing owner to sell at favorable times.
ESOP Buyouts
Advantages for Company employees:
• Receive economic incentive to grow per-share stock value.• Receive capital gains treatment on shares distributed from
ESOP.• Gain ownership perspective and attitude.• Studies indicate ESOP companies are more productive and
profitable than similar-sized peers in same industry classification.
• Company buys back stock after distribution.
ESOP Buyouts
This presentation is not a substitute for legal advice.It is for informational purposes only. For specificguidance regarding ERISA or tax reporting or othercompliance requirements, please consult me individually.Your mileage may vary. Past performance does not guaranteefuture results. Any resemblance to real persons, living or dead,is purely coincidental. Void where prohibited. Subject to changewithout notice. Reproduction strictly prohibited. Use only as directed. Noother warranty expressed or implied. Do not use while operating a motor vehicle orheavy equipment. May be too intense for some viewers. Not responsible for direct, indirect, or
consequential damages resulting from any defect, error or failure to perform.
ESOP Buyouts
Questions? Thank you!
John WalchCallister Nebeker & McCullough
10 East South Temple, Suite 900
Salt Lake City, Utah 84133-1155(801) 530-7327
