The Perfect Buyer – An ESOP?

March 9th & 10th, 2015

Participants:

• Ron Gilbert, President, ESOP Services, Inc.

• Jim Parham, Managing Partner, Transport Capital Partners

• Bill Prevost, President and CEO, Quickway Distribution Services,

Inc.

• Robert Bearden, President, Robert Bearden, Inc.

• Randy Vernon, President, Big G Express, Inc.

Insert Big G Video Here

Agenda Carrier Summary The Ideal Situation ESOP Overview Tax Shields Advantages Challenges Is an ESOP for You? Questions from the Audience

Big G Express• Shelbyville, TN• 467 tractors • 100% owned by ESOP• January 2009 become an ESOP• Combination of Bank and Seller financing

Quickway• Converted to C Corp for the sale in 2004; then became a

100% ESOP-owned S Corp in 2005• Nashville, TN• 1400 tractors• 100% owned by ESOP• Bank and Seller financing• Elected the “Tax-free” rollover (but undone during the

Great Recession)

Robert Bearden, Inc.• Cairo, GA• 200 tractors• July 1, 2012 date of sale• 100% owned by ESOP• Sold to an ESOP (Quickway)

When the Stars Align The ESOP pays a very competitive price for a

partial or complete buyout Sellers pay no capital gains tax The corporation operates as a tax-free entity Banks provide attractive financing ESOP participants have a significant wealth

building opportunity, turnover reduced The business is perpetuated

Employee Stock Ownership Plan (ESOP)

A unique financial technique for the perpetuation of successful privately-owned businesses that provides employees of that business a “piece of the action” A direct stake in the success of the

business

Overview 11,000 ESOPs in U.S. (10% of private

sector) 3,500 majority owned by the ESOP In a broad range of industries 70% of ESOPs are in companies with

fewer than 250 employees As small as a few dozen employees and

as large as 100,000 (Publix Supermarkets)

Financing Experienced ESOP lenders

aggressively “hunting” for deals Seller financing can provide cushion Warrants attached to seller debt

provide up side potential 100% ESOP vs. partial (successor

management team in place??)

ESOP Lenders Bank

Loan is to the company, which makes “back-to-back” loan to ESOP

Typically 5 - 7 years Assessment of company credit similar to

other loans Selling shareholders receives cash up front Sellers can collateralize shortfall with

proceeds from ESOP sale (securities)

ESOP Lenders (continued) Owner/selling shareholder

Take back a subordinated note with warrants Taxed on principal upon receipt at capital gains and interest

as ordinary income under installment sale treatment Principal can be “tax free”

The Company Cash-rich company can make loan to the ESOP Advantage: company repays itself with tax-deductible

contribution Private equity group

Mezzanine financing subordinated to the bank, no collateral May be interest only for several years

Discussion on How Carriers Are Financing their Deals

Tax Shields The ESOP tax shield equals 40% - 80%

Every $1,000,000 of ESOP transaction provide $400,000 - $800,000 in tax savings

Tax-deductible principal repayment IRC 404(a)(9)

Tax-free S corporation income IRC 409(p) and 512(a)

Tax-deferred sale – C corporation stock IRC 1042

Perpetuation Planning C Corporation

IRC 1042 “Tax-Free” Rollover Seller can elect to defer gain on C corporation shares sold to ESOP by reinvesting all or any portion of the sale proceeds in Qualified Replacement Property (“QRP”) QRP is stock or debt instruments of a domestic

operating corporation QRP must be acquired within 12 months of the ESOP sale (or 3 months before) After the sale, the ESOP must own at least 30% of

company

Perpetuation Planning C Corporation

IRC 1042 “Tax-Free” Rollover (continued) QRP can be pledged as collateral

Floating Rate Notes (“FRNs”) provide excellent collateral, and are suitable for monetization Seller must have owned stock for at least three

years Seller cannot have acquired the stock in a “Section

83” transaction, nor from a qualified retirement plan

Seller, certain related individuals, and greater-than-25% owners generally cannot participate in ESOP

“stepped-up” basis at death under current tax law

Discussion of the Tax Impacts on Sellers

Competitive Price Compared to financial buyer 5%-10% marketability discount 10-15% minority discount 30% greater net proceeds if “tax-

free” rollover applies

Discussion of Current Pricing Environment

Advantages Retains employees – lower turnover

rates (30 years of studies) Employees share directly in equity

growth Employer contributions tend to be

larger than profit sharing contributions

ESOP stock allocated proportionate to compensation

Proven motivator Accounts accumulate tax-free

What Advantages did the Carriers Experience?

Challenges Government agency oversight

IRS Clarity – Good continuing dialog, ongoing

Department of Labor – Partial clarity and dialog

(GreatBanc - DOL 2014 settlement)

Challenges (continued) Repurchase Obligation

Corporate Obligation Spread over 5 to 11 years Similar to budgeting for capital

equipment

Challenges (continued) Control - Keep ESOP at minority level - Majority ESOP, proper board and

committee structure, i.e. nominating, etc. allows ongoing operating control

- Trustee votes for Board of Directors Marketing it to employees

Carriers’ Comments on Challenges

Future Sale of Company “An offer you can’t refuse”

Minority ESOP or majority ESOP with equity incentives for key executives Buyouts are typically at substantial

premiums Life span of ESOPs – 6 mos to 40

years

Comparison of After-Tax Proceeds IPO Recap Stock Swap ESOP

90%

8%

50%

40%

100% 100%

Percent available to invest in diversified portfolio

Percent remaining in company stock

100%

75%

50%

25%

0%

The Perfect Buyer – An ESOP?

Competitive price No capital gains tax (low basis?) Tax-free corporate income (S

corporation) Bank financing Seller financing with upside Lower turnover Business perpetuation

Questions from the Audience

Resources

www.transportcap.com

www.esopservices.com

www.nceo.org

www.esopassociation.org