ESOPs for Construction Firms, Contractors, and Subcontractors

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good morning and welcome to the ESOP web seminar for construction firms contractors and subcontractors my name
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is John minke I’m the president Menke and associates today’s seminar will be on a
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question-and-answer format I’ll ask a series of questions regarding how he stops can be used by construction firms
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contractors and subcontractors to accomplish various goals and objectives and Bruce Armstrong will provide the
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answers based on his knowledge and experience in designing he stops for dozens of construction and contracting
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firms Bruce Armstrong as a managing director of Menken associates and has been a member of our firm for over 20
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years only a background Menken associates is the oldest permanent country specializing in Aesop’s our firm was
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founded in 1974 and 2005 marks our 31st anniversary of designing and installing
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e tops over the past 30 years we’ve created more than 2,000 Aesop’s more
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than any other firm in the country we also administer over 800 Aesop’s also more than any other firm in the country
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we have six offices throughout the United States and we have installed Aesop’s in all 50 states let me begin by
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defining what an esop is and he stopped as many things to many people to the
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existing shareholders it’s a buyer of stock that simultaneously offers tax savings to the seller and an orderly
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succession plan for both majority and minority shareholders to the company the ESOP is a technique of corporate finance
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that enables two company to finance growth and expansion and/or shareholder redemptions with tax-deductible dollars
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while simultaneously providing a highly an effective employee incentives plan and to the employees and he stopped with
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a company funded retirement plan that offers imminent Center than a reward that is usually unmatched by any other
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type of retirement plan it’s important to note the nisab consists of both the
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plan and a trust and that the trust is the direct owner of the company stock not the employees typically the company
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owners are designated as the plan trustees and employees will receive annual statements reflecting their
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account balance and ESOP however they are not entitled to company financial statements in order they have voting
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rights except with respect to certain special issues therefore voting control does not have to change when these
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was implemented even when these cellphones a majority of the stock now burst I’d like to ask you the first
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question why is it that Aesop’s are popular with owners of privately held businesses over the past 31 years
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Aesop’s have been increasingly popular among privately held firms because they offer a number of tax and financial
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advantages that are not available under other alternatives the most frequent use of any thought for example is to create
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partial or total liquidity for existing shareholders these ops are uniquely designed to accomplish this objective in
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the great majority of cases the primary purpose of the ESOP is to create an in-house market for existing
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shareholders the advantage that nice up brings to the table is that it enables the company to repurchase years from existing
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shareholders using deductible contributions rather than corporate after-tax funds in the case of a regular
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C corporation Congress has provided that special tax incentives to encourage companies to use these saps for
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shareholder liquidity under this special tax provision if these up acquires 30%
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or more of the stock of a privately held company the tax on the game will be deferred provided that the selling
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shareholders reinvest the proceeds and qualified replacement property in case the best corporations there is also an
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advantage of using an esop to create shareholder liquidity rather than utilizing a stock redemption the
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advantage of selling to an esop is that any amount of stock sold to the ESOP will qualify for the favorable capital
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gain tax which under the current tax code is only 15% at the federal level in the case of a stock redemption the
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redemption has to be substantially disproportionate in order for the redemption to be taxed at capital gain
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rates rather than ordinary income tax rates qualifying a stock redemption as a
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disproportionate redemption is often difficult and in the case of a sole owner is in fact impossible to achieve
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an esop on the other hand is very flexible and it’s not limited by the rules that apply to stock redemptions
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the second reason why Aesop’s have been increasingly popular is that whether the company is a C corporation or an S
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corporation any tough can help a company to substantially eliminate the payment at federal and state income taxes on the
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earnings of the company we will discuss the techniques for doing this and more to later in the session the third advantage
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of using an esop is that in most cases you can continue to control your company just as you do now unlike a sale or a
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merger you can create children liquidity for yourself and for other shareholders of the company yet still retain control
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even after selling a majority of the outstanding stock to the ESOP the fourth advantage of using an esop is that the
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money’s Esau borrows in order to buy out the existing shareholders can be repaid entirely with tax-deductible dollars
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that is to say the company will be able to deduct not only the loan interest as can be done in the case of a stock
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redemption but also the loan principal this is unique to Aesop’s last but not
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least when properly implemented and communicated an esop can have a dramatic effect in increasing employee
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productivity this in turn can result in increased profitability and an increase in the overall valuation of the company
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as a result of the various tax and financial benefits the dese ops have to offer there are now over 11,000 Aesop’s
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currently in existence and these these helps cover over ten million participants it is estimated at the
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total value of all these top assets now exceeds 500 billion dollars now I’d like
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to talk about how you thoughts can be used by owners of construction and contracting firms Bruce what are the
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common ownership problems that are faced by owners of construction and contracting firms the common ownership
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problems that are faced by owners of construction and contracting firms are in general the same problems that are
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faced by owners of privately held firms namely lack of liquidity lack of diversification and the need for a
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succession plan fortunately that you saw is one of the tools that can provide an
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answer to all of these problems it can provide liquidity and diversification for the existing shareholders it can
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also provide for an orderly business succession strategy as a liquidity tool
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the ESOP offers a number of advantages the D soft creates an in-house market whereby existing owners could sell their
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shares as and when they see fit unlike a sale or merger and ESOP allows the
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owners to sell part of their shares rather than having to sell the entire company thus the owners can sell their
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shares over a period of years rather than having to sell all at once since the suck creates an in-house
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market no outside parties involved and there’s a certainty of the outcome also
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the cost of arranging a sell-through nice off is a fraction of the cost that would be incurred in a sale to a third
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party as a tool for investment diversification esop allows you to
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diversify whatever amount of stock you wish to liquidate and invest in other investments such as cash fixed income
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securities or equities the mix of investments selections is entirely up to you as a tool for business succession
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the you thought is probably the least stressful method of ownership transfer due to the fact that it does not involve
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an outside buyer with an East out there is a certainty of the outcome and there is less likelihood of employee layoffs
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and/or changes and management in fact an esop purchase can also be combined with the management buyout so that management
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can also acquire significant equity in the company the particular advantage that nice offers is that it can provide
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for a gradual change of ownership to the employees in the meantime the existing owners still retain the right to sell
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the entire company at a later date and still retain the right to control the company in the meantime first it’s easy
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to see that these stops offer a number of financial and tax advantages that are not offered by other alternatives why is
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it that Aesop’s are especially popular with construction and contracting firms I think that Aesop’s are especially
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popular with construction and contracting firms because these firms are actually service businesses where
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the success and profitability of the firm depends heavily on the productivity of the employees another reason why he
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stops are so popular with construction and contracting firms is that as a general rule these firms prefer to be
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locally owned and operated unlike manufacturing and other industrial types of firms it is more
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common for construction and contracting firms to be acquired by their managers and employees than to be acquired by a
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competitor a public company or by a financial buyer such as a buyout firm a third reason why construction and
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contracting firms utilize Aesop’s is that the ESOP can be a very useful tool in helping a company attract and hire
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high quality employees again good employees are much more inclined to accept the job offer from a firm that
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provides the opportunity ownership then it from a company that provides no such opportunity
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lastly Aesop’s are popular among construction and contracting firms because these types of firms fully
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recognize that their employees are in fact their most valuable asset in the absence of a nice offer or a similar
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type of program there’s always the risk that the key employers will simply walk out of the door and start up a competing firm for all of the foregoing reasons I
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think that Aesop’s are especially good fit for construction and contracting firms first given that he stops are in
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general a good fit for construction contracting firms are there any situations where any stops not a good
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fit for a construction or contracting from yes there are a few situations for
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knees up is not a good fit one situation would be for the firm is simply too small to have an you saw as you know we
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have done Aesop’s for companies with as few as 10 employees in as many as 10,000 employees however it is usually not economical to
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install our maintain an esop if the company has fewer than 10 employees in addition if the company is an S
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corporation and has 10 or fewer employees it can often be difficult to comply with the so called anti abuse
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provisions that are set forth in Section 409 P of the code if the company cannot comply with these provisions then it
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will either have to forego becoming an esop or convert to C corporation status the second situation where an esop is
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not a good fit is where the company is relatively new and not yet profitable in order for an esop to be a most effective
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the company needs to be profitable and paying taxes the third situation where nice F is not a good fit is where the
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company’s employees are almost all Union employees in these cases the company will usually be making large
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contributions to the Union pension plan and will not be able to afford making additional company contributions to an
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esop he thought for generally used for for principal purposes to create
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liquidity and diversification for sellers to increase employee productivity increase company cash flow
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and to provide for business accession let’s start by discussing how he stops
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are used to create liquidity and diversification for sellers Bruce how are he stopped transactions typically
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structured to create liquidity and diversification for owners of germs pretty much the same way they are
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structured for other types of firms how the ESOP destructor depends upon the goals and objectives of the current
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shareholders Aesop’s can be extremely flexible in how they can be structured for shareholder liquidity purposes in
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general there are three basic ways an esop can be structured the first is what
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I call a pre funded ISA a pre fund of these office one where the Yousaf is established and the company makes
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contributions to the plan in cash which is accumulated to be used later to purchase stock from the shareholders
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many companies start out by using a pre fund of these up as would it generate correct tax deductions and as a way to
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accumulate cash in the plan where for one reason or another the current shareholders are not yet willing to
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start selling their shares under the current code provisions a company is allowed to make tax deductible
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contributions each year in an amount up to 25 percent of eligible payroll thus
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for example if the company’s eligible payroll is a million dollars it could make tax deductible contributions of up
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to 250 thousand dollars per year thus that the company contributed the maximum amount each year after period of four
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years the plan will have accumulated at least a million dollars in funds plus however much interest might be earned on
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these funds many times the company is already spending these funds in a 401k match or in profit errant contributions
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which do not have the same flexibility to invest in Company stock the second
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way that an esop can be structured is as a gradual ESOP a gradually Sophos one for the company makes discretionary
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contributions each year up to the maximum deductible amount and uses these contributions to purchase shares from
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the existing shareholders on a year-by-year basis the advantage of this approach is that it’s highly flexible
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the company has complete discretion as to how much it contributes to the plan each year the event is to the selling
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shareholders is that they are only selling a small percentage of their stock from year to year however unlike a
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stock redemption each and every sale to be stopped will qualify for favorable capital gains treatment in the case of
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the C corporation once the Asaf is acquired 30 percent or more of the outstanding stock than that the sellers
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can elect to defer indefinitely the taxation of their cow games provided that certain conditions
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are met the third way that Nisa can be structured is as a leveraged ISA a
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leveraged ESOP structure is used when the shareholders want to cash out more quickly or in the case of a
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c-corporation one that will immediately qualify for the tax deferral of their capital gains taxes as I mentioned
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earlier in order to qualify for the tax deferral these up must acquire at least 30% of the outstanding shares unless the
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plan has been pre funded the Yourself will usually have to be leveraged in order to have enough funds to purchase
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30% of the outstanding stock and how is the plan leveraged does the plan borrow the money it is the company borrow the
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money a good question let me explain this by giving a specific example let’s
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assume that we have a company with annual sales of 10 million dollars an eligible payroll of a million dollars
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pre-tax profits of $600,000 and a fair market value of 3 million dollars let’s
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further assume that the youth wants to purchase 30% of the outstanding stock for a price of $900,000 the way this
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works is that the bank lends $900,000 to the company and the company then lends the $900,000 to the ISA the ISA then
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purchases 30% of the outstanding stock from the company shareholders for $900,000 in cash at the end of the year
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the company then makes a tax-deductible cash contribution to the ESOP in an amount of up to 250 thousand dollars
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plus interest the ESOP then uses that contribution to repay interest and principal on the company loan the
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company then repays the bank loan assuming that the sellers qualify under the tax deferral provisions it will wind
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up saving anywhere from $135,000 two hundred and eighty thousand dollars in federal and state taxes depending upon
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the state income tax rate of course these structures can be combined if
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useful and necessary case four for example combines the pre-funding and leveraging ideas of cases two and three
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in this slide for example you will note that the company pre-funded the assualt for two years accumulating about $4,000
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of cash meanwhile the company grew from the fair market value of 3 million dollars to 3 point 3 3 million at the end of the
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third year in order to reach the 30 percent threshold these up needs to own a million dollars of company stock since
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four hundred thousand dollars is already accumulated the required bank loan need only be a six hundred thousand dollars
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which is three hundred thousand dollars less and would have been required if no pre-funding had occurred therefore the
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required loan is reduced by thirty three percent and the annual debt services reduced by over eighty one thousand
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dollars a year similarly case five combines year by year purchases with a tax deferred sale
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in year four as shown by this slide at the end of the first year that you suffered purchased three percent at the
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end of the second year the you separate hold seven percent at the end of the third year it would hold twelve percent
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each of these sales would be taxed to capital gain rates however the sale in
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year four would result in these uploading 30 percent thus the seller would be able to elect the tax free
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rollover with respect to the stock soul to the ESOP in year four t six
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illustrate any stuff can be structured to accomplish a hundred percent you saw buyout in most cases it is not possible
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to obtain financing to accomplish a hundred percent you stopped by out all at once the first year accordingly a
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hundred percent you thought by out is usually structured as a two-stage you saw buyout in the first stage for
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example these up might be structured in an amount sufficient about fifty percent of the outstanding stock then after this
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loan has been paid down the plan could be real Everage din year four to buy the remaining 50 percent Bruce what if
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there’s more than just one shareholder of the company what there’s a majority shareholder and one more minority
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shareholders can any stop offer to buy out the majority shareholder without also offering didn’t make the same offer
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to a minority shareholder in most cases the shareholders will readily agree among themselves as to
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whether the ESOP is to be used to purchase part or all of the stock of the majority shareholder or part or all of
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the stock of one or more minority shareholders or a combination of the two however if for some reason the shoulders
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cannot agree among themselves then it is typically the case that these opt will buy stock from all of the shareholders
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on a pro-rata basis you’ve mentioned earlier that in the case of the C
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corporation there’s a special provisioning the code that allows the selling shareholders to receive their proceeds on a tax-deferred
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or tax-free basis can you tell us a little more about how this works yes
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under Section 10 42 of the code if an ISA acquires 30% or more of the stock of
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a privately held C corporation the capital gains tax on the amount of the gain will be deferred provided that the
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seller reinvests a light amount of money in qualified replacement property within 12 months from the date of sale this tax
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deferral will continue as long as the seller continues to hold the qualified replacement property if the seller holds
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the property until is death then it will receive a step-up in basis and the capital gains tax will be completely avoided this type of
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transaction is typically referred to as a tax-free rollover qualified replacement property consists of stocks
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or bonds of American corporations the corporations may be large or small public or private but they must be
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American the seller cannot invest in a mutual fund or in government securities unless he’s willing to pay capital gains
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tax most sellers who elect a tax deferral wind up investing the proceeds in a diversified portfolio of corporate
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stocks and corporate bonds a seller can always sell part or all of his
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replacement securities later on to the extent that he does so however he will have to pay capital gains tax that was
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previously deferred as well as a gain on any subsequent appreciation Bruce is
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there any way to avoid being locked into these replacement securities and having to hold the same investment portfolio
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until death yes there’s a relatively simple way around this problem and that is to purchase long term ESOP bonds and
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then margin out 80 to 90 percent of the proceeds for example assume a seller receives $900,000 from the sale of stock
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to the ESOP he or she could then purchase nine hundred thousand dollars worth of long-term isaw bonds and then
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this purchase would satisfy the requirement that the seller must purchase qualified replacement securities the teller could then margin
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out say seven hundred twenty thousand dollars of the proceeds and invest those funds as he or she sees fit who she has
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mentioned that the tax-free relevant provisions do not apply to shareholders of an S corporation are there tax
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advantages that apply to an S corporation on the and that did not apply to a c-corporation yes as you know in a case
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of an S corporation all the earnings of corporations are taxed at the shareholder level rather than at the
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corporate level as you also know that these up is a tax-exempt entity thus to the extent that the stock of it S
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corporation is owned by an esop part of the company’s earnings will be exempt from income tax thus in the case of an S
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corporation that is a hundred percent owned by knees up none of the Corporations earnings will be subject to income taxes these ups
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here of S corporation earnings is also exempt from the unrelated business income tax there were only two
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disadvantages to ask corporation ethos the principle of disadvantage is that there are is no tax free rollover
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available to the sellers the sellers must pay their capital gain tax on their sale a second disadvantage is that S
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corporation you shops must cover a broadly based group of employees under this test if disqualified persons owned
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more than 50% of what is called deemed owned shares the nice ops share of
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earnings will be subject to the unrelated business income tax and it is qualified persons will be subject to certain excise taxes rusev knew of the
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fact that in the case of S corporation Aesop’s the tax benefits accrue more for the benefit of the company itself rather
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than for the benefit of selling shareholders re stock transaction is struck structured differently for S
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corporations and for C corporations basically all the same transaction structures that are used by C
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corporations are also used by US corporations as in the case of C corporations with S corporation Aesop’s
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some are structured as pre-funded Aesop’s some Aesop’s are structured as gradually software these saw purchases
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shares year by year and some are structured as leveraged Aesop’s however because the company will be a hundred
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percent tax exempt if the Yousaf is the sole shareholder we have seen many more one hundred percent you saw buy out the
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best corporations than we have seen in the case of C corporations also because of the difficulty of securing 100
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percent bank financing for a buyout many of these transactions have been structured with 100 percent seller
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financing here is an example of how leverage these subs are typically structured for US corporations
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in this example the owner bill is the sole shareholder and pays himself a salary
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two thousand dollars a year there are 20 other employees that have a total compensation of $800,000 so that Bills
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compensation is 20% of the total payroll the company has a value of four million dollars k7 shows how the transaction
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will be financed with seller financing in this case bill becomes the banker himself by taking back an installment
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note from the ESOP bill will receive installment payments over the term of the note as he receives the principal he
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will have to pay a capital gains tax on the portion of the principal payment that represents gain and he will pay
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ordinary income tax on the interest portion but the important thing to point out is that these app now owns 100% of
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the company the company no longer has to pay any income taxes assuming a pre-tax
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profit of $800,000 this would result in a tax savings of over $300,000 that
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would otherwise have to be paid each and every year in taxes that same $300,000 can be used instead to pay for a large
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portion of the installment payments will be paid the bill each year on this installment note the next slide
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illustrates two points with respect to leverage Aesop’s first adulterates how the debt is repaid in the case of an S
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corporation the debt is repaid by having the company make tax deductible contributions to these up which the ESOP
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then uses to make no payments to bill in the case of an S corporation that debt also can be repaid by using the S
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corporation distributions that are paid to the ESOP and then use to make no payments to Bill debt is repaid the same
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way in C corporations except that C corporations aren’t allowed to make S corporation distributions to
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shareholders instead there is a special code provision that allows C corporations to pay so-called deductible
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dividends to the ESOP over and above tax deductible contributions normally C
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corporations don’t pay dividends because these dividends are non tax deductible however in the case of an esop if
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they’re used to repay ESOP debt the dividends will be tax deductible the second point that the slide is to
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illustrate how stock is allocated in the case of a leverage do so in the case of a gradual esau the stock is allocated on
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a year-by-year basis as and when shares are purchased in the case of a leveraged ESOP the stock is allocated to
24:17
participants as no payments are made thus if these op purchases a hundred percent of the outstanding stock all of the stock is
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initially held by the ESOP in a suspense account then each year as the company
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makes contributions to the plan and the contributions are used to make no payments to the seller or to the bank
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lender if the bank is involved a pro rata portion of this years is released from the suspense account and allocated
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to the accounts of the participants the block of stock that is released from the suspense account each year is then
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allocated among the accounts of the participants in proportion to cover compensation the other alternative for
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structuring a leopard co-op is to have the transaction financed with a bank loan rather than its seller note thus if
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Bill wants to receive cash right away for his stock an external bank financing would be required in order to put four
25:07
million dollars into Bill’s pocket right away thus case eight is the same as case seven with the exception that a bank is
25:14
now involved the concept however is exactly the same the ESOP owns 100% of
25:19
the company therefore the company pays no taxes and that lender is being repaid
25:24
with pre-tax dollars because the company is now exempt from paying any taxes when
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the ESF is bank financed or seller financed the results will be the same in either case first the company’s earnings
25:36
will no longer be subject to income tax second bill will receive four million dollars and will pay capital gains tax
25:43
on his gain third since bill’s compensation constituted 20% of the
25:49
total covered compensation bill will be allocated 20 percent of the stock within the ESOP and you will be able to cash
25:55
that out later when he leaves the company you should note that this is a benefit that does not apply in the case
26:01
of a C corporation where the seller has sold stock to the ESOP and elected the tax reroll overtreatment in that case
26:07
there is a special rule of prohibits the selling shareholder and related parties from receiving any allocation of stock
26:13
that was sold in the tax-free rollover transaction fourth since the earnings of
26:18
the company are no longer subject to income tax the company no longer has to make distribution to the shareholders to
26:24
enable them to pay their income taxes instead these funds can now be used to
26:29
repay debt after the debt repaid these can be accumulated in the company and
26:34
used to make acquisitions or to otherwise fund growth and company expansion so far we’ve talked about e
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stops being used to create liquidity and diversification for the shareholders a second use of e stops is to increase
26:48
employee productivity sometimes the primary purpose for adopting any stock
26:54
is to create a direct link between the employees productivity and their retirement benefits simply common sense
26:59
that people work best when they work for themselves as they say no one ever washes a rental car the concept of an
27:07
e-stop is to have employees they can act like owners Bruce the obvious question that arises do we stops in fact
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increased employee productivity yes numerous studies conducted over the last
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17 years have all concluded that Aesop’s increased company performance for example one of the early studies found
27:25
that employee absenteeism went down by 66% an employee turnover went down by 50% after implementing an ISA more
27:34
recently there were two Harvard Business Review studies that found that sales growth any sub companies was
27:39
significantly higher than in comparable annoying self companies more importantly two independent studies one by
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Northwestern University’s Kellogg School of Management and one by hewitt associates both found that ESOP
27:52
companies had a higher return on assets and a higher return on shareholders equity than comparable one’s-self
27:57
companies Bruce what is the impact of increased employee productivity on
28:02
profitability and the overall value of the company is the impact relatively nominal or is it significant well the
28:10
impact can be quite significant this slide illustrates for example a 2% increase in productivity and literally
28:17
result in a 50% increase in profitability in this case we assume that a company has 10 million in
28:24
revenues a pre-tax profit of 400 thousand dollars as indicated if the sales force can increase revenues by 2%
28:30
but hold expenses constant the pre-tax profit increases by 50 percent another
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way the profitability could be increased by 50 percent would be if the employees are able to produce expenses by 2 percent while holding revenues
28:45
of course the employees can both increase revenues by 2% and reduce expenses by 2% then the company would
28:52
literally experience a 100% increase in profitability the third use of an esop
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is to increase corporate cash flow this can be accomplished by simply having the
29:03
company contribute newly issued stock or Treasury stock to be stopped on a year-by-year basis result this reduced
29:10
corporate taxes and increased cash flow while simultaneously providing a retirement benefit for the company’s
29:16
employees there is one of the pros and cons of using an esop to increase company’s cash flow as you just
29:22
mentioned the principle advantage of using an esop to increase cash flow is that the company’s cash flow in network
29:28
will be increased the potential disadvantage is that issuing new shares of stock to the ESOP will create
29:33
dilution to original shareholders actually there is no dilution if the
29:39
contribution to the esop is in lieu of cash bonuses or cash contributions that would be made another form of retirement
29:45
plan as illustrated by this slide for example if the company contributes $3,000 worth of stock to the ESOP in
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lieu of a $300,000 or O&K matching contribution or a three or thousand
29:56
dollar profit sharing contribution the company has in effect received $300,000 of cash in exchange for 302 thousand
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dollars worth of stock if the company puts this money to good work the value of the company will increase for the
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benefit of all of its shareholders if the company does not spend the money wisely then there will be dilution of
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the shareholders equity the fourth years of an esop is to create a succession
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plan for the existing shareholders in my view an esop is the least stressful and
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most efficient means of transferring ownership to the next generation for three primary reasons first it utilizes
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pre-tax cash flow rather than after-tax cash flow second it’s usually done in stages and therefore involves less
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leverage and third it usually involves no change in management control at the outset in most cases there’s only a
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gradual change in management control over a long period of time Bruce what’s your view of an esop as a tool for
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business succession in the area of business in transition Anisa on its own is
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usually not the sole answer to one’s objective for example many owners wish to reward their key employees as well as
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certain family members in addition to these sub participants stock sales can be made directly to the key group of
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employees and stock grants can be made to family members in many at not most
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cases we recommend creating a separate non qualified management stock bonus plan that is created specifically for
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the key employees will be responsible for the long-term growth and succession of the business
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Bruce we’ve talked about the various advantages of any stock what are the disadvantages of an esop there are
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several potential disadvantages of an esop depending upon a particular situation however in most cases the
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alleged disadvantages are more perceived than real one potential disadvantage of
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the sales would be soft versus a sale to a third party is that a sale to an esop depends upon the ability of the company
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to obtain the necessary financing if the transaction is financed with a bank loan the company must have the ability to
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obtain the necessary bank loan based upon having sufficient cash flow to service the loan and sufficient assets
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to collateralize the loan if the company does not have sufficient collateral the seller may have to give a personal
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guarantee or may have to pledge a portion of the qualified replacement securities on the other hand a seller
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can always sell finance a sale in whole or in part if sufficient bank financing is not available another potential
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disadvantage of an esop sale is a Yousaf debt incurred to finance the transaction will reduce the company’s network this
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is no different than in the case of a stock redemption or a management buyout and in most cases has little or no
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impact on the company’s operations the only case though where this does have an impact is in the case of contractors and
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construction companies that are required to obtain a surety bond a surety bond is usually based on a percentage of the
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company’s working capital and net worth a general rule of thumb is that the ratio of working capital to backlog must
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be at least 5% and the ratio of net worth the backlog must be at least 10% for example if a contractor has working
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capital of $500,000 a tangible net worth of $1,000,000 would probably qualify for
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a surety bond of 10 million if however the company’s net worth was reduced to $5,000 then he
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would probably only qualify for a surety bond to 5 million in general shareholders of contracting firms should
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sell gradually over a period of years in order to avoid any sudden reduction in network and bonding capacity
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Sharyl resolution is another potentially soft disadvantage shareholder dilution
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comes about only if these up is funded with newly shares of Company stock since
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most Aesop’s are funded with cash which is used to purchase years of existing stock rather than newly issued stock
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dilution seldom comes into play even if the ESOP is funded with newly issued share as the dilution is usually not
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that significant as illustrated by this slide in fact that the cash flow savings
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are put to good use the dilution becomes advantage rather than a disadvantage to the extent that enables the shareholders
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to own a small piece of a larger pie a common misperception is that nisa
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results in loss of control this is not at all true in an esop the Board of
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Directors appoints the controlling shareholder as the plan committee and the trustee of the plan thus the
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controlling shareholder continues to vote the shares that the assault of the plan as well as the shares these two
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loans outside of the plan the plan committee directs the voting of all these soft shares on all ordinary issues
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such as the annual election of the Board of Directors thus there is never any loss of control the only exception is
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that the participants in the plan are allowed to vote on certain special issues these special issues the
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participants are allowed to vote upon include merger consolidation
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recapitalisation liquidation or sale of substantially all the corporate assets even on these special cases however the
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participants are only allowed to vote with respect to those shares that have been actually allocated to their accounts all unallocated shares are
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still put above the trustee also participants do not vote upon any proposed sale of the stock to a third
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parties since this is a fiduciary decision not a decision that requires a shareholder vote it is important to note
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that having an e-stop does not take away any of the other shareholder liquidity questions the controlling Childre can
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still sell is remaining nani Thoth shares to a third party and the plan committee can still elect to sell all of
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the software through a third party another misperception is that having an
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esop will require that the company disclose confidential financial information again this is not true at
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all the only disclosures that are required are that the participants must be furnished with an annual benefit
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statement which discloses their total account balance their percent vesting and the per share value of the stock
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having an esop does not expose the trustees to any greater degree of fiduciary liability than they would have
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as trustees of a pension or proper churring plan in fact the fiduciary liability with an esop is somewhat less since the trustees
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of the software exempt from the normal requirements to earn a fair rate of return to diversify to plan investments
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and to provide investment liquidity yet another misperception is that having an
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esop creates a repurchase liability for the stock that is acquired by the ESOP the fact of the matter is all stock
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ultimately will need to be repurchased this is why stock has value the difference is that in an esop the
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repurchase of such stock will be spread out over the lives of all the plan participants and will be made with
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tax-deductible dollars whereas in the case of a stock redemption the repurchase will come due all at once
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upon the death or retirement of the owner and will be made with after-tax dollars lastly it should be noted that
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selling to an esop unlike larger or sale to a third party is not an irreversible decision if you later change your mind
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these up can be terminated and all the shares can be distributed and repurchase in the alternative these up can be
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frozen and the shares can be gradually repurchased as employees die and retire
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thanks Bruce Lincoln associates is a specialist employee stock ownership plan design installation administration and
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valuation Menken Associates has been designing these table since 1974 and offers a full spectrum of e-stop
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services the design and installation services provided by Menken associates
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include preparation of the formal business appraisals the company financial consulting regarding the
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transaction drafting of all legal documents IRS approval of the plan documents
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preparation of the employee communications booklets conducting PowerPoint presentations for the
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employees and assisting in setting up the accounting and administration system required for the plan an annual basis
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Menken associates also provides annual record-keeping services including the
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preparation of individual employee benefit statements an additional service that is required annually is the update
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of the stock appraisal in order to report the employees the value of their retirement plan as well as to establish
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the value should be stopped by a second or third block of stock it’s critical to
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use an e-stop firm that’s a specialist in this area with an experienced firm fully soft services will be provided at
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less cost to the client and there’ll be fewer errors incurred in the process and can associate that designed over 2,000
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Aesop’s since our inception in 1974 and we are the nation’s number one firm and
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ESOP activities Menken Associates is headquartered in San Francisco with
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offices in Los Angeles Portland Oregon Chicago Atlanta and Wilmington Delaware
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our appraisers are located throughout the country as well but how do you know
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if your business is an appropriate candidate for an esop just take a few minutes to complete the confidential
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feasibility questionnaire form on our website at wwlp.com fax or email this
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information back to our home office and we’ll then give you a call to discuss our findings and the feasibility of an
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e-stop to accomplish your objectives again if you’d like to have us perform my free preliminary analysis please give
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us a call at 834 78357 or you can
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complete the questionnaire form by clicking on the button at the top of the screen thank you for viewing our usopp
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web seminar and again we look forward to talking with you at your earliest convenience