Transcript ESOP POWER - Ati Capital Group Inc

ESOP POWER
An Advanced Planning Strategy
For
Privately Held Companies
Presented by:
ATI Capital Group, Inc.
What is an ESOP
• ESOP = Employee Stock Ownership Plan
• An ESOP is a QUALIFIED PLAN under
the Employees’ Retirement Income
Security Act of 1974 (ERISA)
• See Sections 401(a), 4975(e)(7), and
501(a) of the Internal Revenue Code of
1986, as amended, and Section 407(d)(6)
of ERISA, 1974
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ATI Capital Group, Inc.
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Unique Features of ESOT
An ESOP trust “ESOT” has three very unique
features:
1. ESOT must own “principally” stock in its
sponsor company.
2. An ESOT is the ONLY qualified plan under
ERISA allowed to BORROW MONEY!!
3. The trust can purchase the Company in
“Stages” (multiple transactions).
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ATI Capital Group, Inc.
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Powerful Use #1: Exit
Strategy
Qualified
QRPs
Replacement
Sec. 1042 Property= Stocks
& Bonds
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Collateral
$ Loan
Div’d $
Lender
1
Corporation
The Basic
Transaction
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No Tax on
Transaction
Company
Deducts Princ.
On Loan
$ Loan
$
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ESOP
ATI Capital Group, Inc.
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Benefits to the Corporation
 100% deductibility of PRINCIPAL and interest on ESOP
loan to buy-out Shareholder.
 Increased cash flow due to deductibility of principal on
loan.
 100% deductibility of DIVIDENDS paid to reduce ESOP
debt or distribute to participants.
 Collateral for ESOP created outside company.
 Preferred terms on ESOP loan.
Principal shareholder bought out for $0.66
dollars, compared to $1.52 dollars.
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How to Deduct Principal
Under ERISA
$121,328
Step 3
Lender
Co. makes payment
to lender
ABC
Step 1
Manufacturing $121,328 Co. makes
Company
contribution to ESOP
(fully deductible)
$
Step 2
ESOP makes
mirror payment
on Note Payable
to Co.
ESOP
$
Results:
Tax Deductible
Principal &
Interest
Assumptions:
•$10,000,000 ESOP transaction
•Terms: 8% APR; 10 yr. Amortization
•Monthly P + I = $121,328
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Benefits to the Selling
Shareholder
• Tax Deferral on 100% of the proceeds from the
sale of stock to the ESOP, under Sec. 1042 of
the Internal Revenue Code!
If the transaction is structured properly, capital
gains tax may be permanently deferred!!
NO CAPITAL GAINS TAX ON THE SALE OF
YOUR STOCK TO AN ESOP – EVER!
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ATI Capital Group, Inc.
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Avoiding Taxation!
What’s it Worth??
Assuming a $10,000,000 transaction, with loan terms of 7 yrs. @ 7% APR
-all numbers are approximate-
Benefit to the Corporation:
($10mm x .34)
$3,400,000
Benefit to the Seller:
($10mm x .20)
Plus: Earnings on additional $2mm
invested for 7 yrs. @ 7% (net of tax)
2,000,000
730,000
$6,130,000
Total SAVINGS
Available 61.3% Savings
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ATI Capital Group, Inc.
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Powerful USE #2:
Purchase of Capital Goods
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Capital
Goods
Collateral
Lender
4
1
$ Loan
The Basic
Transaction
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$ Loan
2
3
$ Cash
Corporation
Stock
Capital Goods
Purchased With
Pre-Tax Dollars =
INCREASED
CASH FLOW
CAUTION:
Dilution!!
ESOP
ATI Capital Group, Inc.
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Benefits to the Corporation
 100% deductibility of PRINCIPAL and interest on ESOP
loan to buy capital goods.
 In addition to above deduction, can write-off capital goods a
second time by means of DEPRECIATION.
 Increased cash flow due to deductibility of principal on
loan.
 Collateral for loan created by acquiring the capital goods.
 Preferred terms on ESOP loan to acquire capital goods.
Capital Goods Acquired for $0.66 dollars (PT),
compared to $1.52 dollars (AT).
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ATI Capital Group, Inc.
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Powerful USE #3:
Purchase of a Target Company
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Target
Company
Collateral
Lender
4
1
$ Loan
The Basic
Transaction
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$ Loan
2
3
$ Cash
Corporation
Stock
Target Company
Purchased With
Pre-Tax Dollars =
INCREASED
RETURN ON INV.
CAUTION:
Dilution!!
ESOP
ATI Capital Group, Inc.
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Benefits to the Corporation
 100% deductibility of PRINCIPAL and interest on
ESOP loan to buy Target Company.
 Increased cash flow due to deductibility of principal
on loan.
 Collateral for loan created by acquiring the Target
Company.
 Preferred terms on ESOP loan to acquire Target
Company.
Target Company Acquired for $0.66 dollars (PT),
compared to $1.52 dollars (AT).
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ATI Capital Group, Inc.
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Powerful USE #4:
Payoff Existing Debt with PT $
Lender
Existing debt paid
off with Pre-Tax
Dollars =
INCREASED
CASH FLOW!!
Pay-off
Orig. Loan
4
New Loan $
1
Corporation
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3
$ Cash
The Basic
Transaction
$ Loan
Stock
Existing Debt
CAUTION:
Dilution!!
ESOP
ATI Capital Group, Inc.
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Benefits to the Corporation
 100% deductibility of PRINCIPAL and
interest on ESOP loan to pay off existing
debt.
 Increased cash flow due to deductibility of
principal on loan.
 Collateral for loan follows new loan.
Existing debt paid off for $0.66 dollars (PT),
compared to $1.52 dollars (AT).
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Who Should Consider an
ESOP?
• A corporation – (‘C’ or ‘S’). No PCs or PAs!!
• Corporation must have unused debt capacity.
• Corporation must be profitable and able to easily cash
flow add’l ESOP acquisition debt.
• Corporation should be paying taxes at, or near, the top
marginal rate.
• Corporation in business for at least five years.
• Corporation with annual payroll of at least $1 million
(not counting selling S/Hs).
• Corporation doing at least $7 mm in annual revenues.
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Who Should Consider an
ESOP? (Cont’)
• Corporation doing business in a solid industry with a
positive future.
• Corporation must have strong secondary management in
place.
• Majority S/H interested in selling-out, or starting the
retirement process.
• Majority S/H who is favorable toward employee
ownership.
• Secondary management interested in ownership and
capable of taking over business.
• Management interested in acquiring capital goods,
another company, or paying off existing debt with pretax dollars.
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Solution vs. Tool
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Difficult Questions
• Are you interested in getting some of your investment
out of your company without any tax consequences at
all?
• Are you interested in starting the retirement process?
• Do you have a solid plan as to how you will retire, or
pass your company on to the next generation, or even
sell your company to an outside party?
• Would you like to sell your company and pay no tax on
the gain, and at the same time, significantly reduce
estate taxes?
• Did you know that your company can purchase your
stock and fully deduct the entire purchase price?
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Results For the Seller
1) No tax on the gain, when stock is sold to
an ESOP.
2) Seller can greatly reduce estate tax by
combining an ESOP with an FLP.
3) Seller does not lose effective control
after sale.
4) Seller can choose next generation of
mgmt.
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Results For the Company
1) Can deduct the full purchase price of Seller’s
stock.
2) Can purchase Seller’s stock using a long-term
loan with desirable terms.
3) Can deduct entire purchase price of capital
equipment plus depreciate it.
4) Can payoff existing long-term debt with pretax dollars.
5) Can purchase a Target Company with pre-tax
dollars.
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ATI Capital Group, Inc.
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Results For the Employees
1)
2)
3)
4)
5)
6)
Maintain jobs as company ownership passes.
Share in growth of company.
Good retirement plan.
Have Put Option and independent valuation.
Have funded market for company stock.
Have no liability on the loan to purchase
stock.
7) Plan is 100% contributed by company.
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ATI Capital Group, Inc.
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The Alliance
Project Manager/Consultant
CPA
Attorney for ESOP
Attorney for Corporation
Valuation Professional
Insurance Professional
Trustee
Plan Administrator
Lender
Investment Advisor
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ATI Capital Group, Inc.
ESOP Alliance
Your Strategic Partner
We Provide
Your
One-Stop-Shop
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