The Use of ESOPs to Finance Mergers and Acquisitions

Advantages to C Corporations Many companies that have ESOPs fail to realize that their ESOP can be used to the finance acquisitions with pre-tax dollars. Normally, when debt is incurred to finance an acquisition, only the interest payments are deductible.  Principal payments are not deductible.  However, if the acquisition is financed through an ESOP, both the interest and the principal payments will be fully deductible, and this will be true whether the plan sponsor is structured as a regular C corporation or as an S corporation. In addition, if both the acquiring company and the target company are structured as  regular C corporations, or both convert to C corporation status before consummating the merger, then the shareholders of the target corporation can qualify for tax-free rollover treatment upon the sale of their stock to the acquiring company’s ESOP.  This additional tax savings gives the acquiring company a distinct advantage in ... Read More..

How to Structure Stock Ownership Plans for Management Employees

WHY IT IS IMPORTANT TO MOTIVATE MANAGEMENT EMPLOYEES Attracting and retaining key employees is necessary to the success of any corporation. This factor is even more important in an ESOP company, since the number of beneficial owners in an ESOP company is much greater than in a non-ESOP company. The most effective way to motivate management employees is to give them a piece of the action. Management employees are accustomed to getting a substantial piece of the action whenever a management buyout is involved. Accordingly, it is sometimes important that management receive a piece of the action in the case of ESOP buyouts. Under IRS regulations, the “covered compensation” of a key employee is limited to $205,000. In addition, the “covered compensation” of the key management group in most companies is less than 5% of the total covered compensation of all employees. Since the key management group receives a limited ... Read More..