ESOPs for Insurance Agencies

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good morning and welcome to the web esop seminar on esops for insurance agencies
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my name is john menke and i’m the president of Menke and associates inc today’s seminar will be in a
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question and answer format i will ask a series of questions regarding how esops can be used by insurance agencies
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to accomplish various goals and objectives and kyle copeland will provide the answers based on his knowledge and experience in designing
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esops for dozens of insurance agencies kyle is the chief executive officer of menken associates
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and has been a member of our firm for over 25 years by way of background menkin associates
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is the oldest firm in the country specializing in esops our firm was founded in 1974 and 2005
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marks our 31st anniversary of designing and installing esops over the past 30 years we’ve created
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more than 2 000 esops more than any other firm in the country we also administer about 800 esops also
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more than any other firm in the country and we have six offices throughout the united states
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and we’ve installed esops in all 50 states let me begin by defining what an esop is
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an esop is many things to many people to the existing shareholders it’s a buyer of stock that
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simultaneously offers tax savings to the seller and an orderly succession plan for both
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majority and minority shareholders to the company the esop is a technique of corporate finance that enables a
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company to finance growth and expansion and or shareholder redemptions with tax deductible dollars
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while simultaneously providing a highly effective employee incentive plan and to the employees an esop is a
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company-funded retirement plan that offers them an incentive and a reward that is usually unmatched by any
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other type of retirement plan it’s important to note that an esop consists of both a plan and a trust
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and the trust is the direct owner of company stock not the employees typically the company owners are
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designated as planned trustees employees will receive annual statements reflecting their account balance in the
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esop however they are not entitled to company financial statements nor do they have voting rights except
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with respect to certain special issues therefore voting control does not have to change when an esop was implemented
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even when an esop owns a majority of the stock now kyle i’d like to ask you the first question why is it that esops are
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popular with owners of privately held businesses over the past 31 years ethos have been
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increasingly popular among privately held firms because they offer a number of tax and financial advantages
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they’re not available under other alternatives the most frequent use of an esop for example
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is to create partial or total liquidity for existing shareholders ethotops are uniquely designed to
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accomplish this objective in the great majority of cases the primary purpose of the esop
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is to create an in-house market for existing shareholders the advantage that esop brings the table
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is that it enables the company to repurchase shares from existing shareholders using tax deductible contributions
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rather than after tax funds in the case of regular c corporation congress has provided a special tax
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incentive to encourage companies to use esops for shareholder liquidity in a special tax provision if the esop
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acquires 30 or more of the stock of privately held company the tax on the gain will be deferred
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provided that the selling shareholders reinvest the proceeds in qualified replacement property
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in the case of s corporations there’s also an advantage of using esop to create shareholder liquidity rather
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than utilizing a stock redemption the advantage of selling to an ethop is that any amount of stocks sold to esop
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will qualify for the favorable capital tax rate which under the current tax code is only 15
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at the federal level in the case of stock redemption the redemption has to be substantially
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disproportionate in order for the redemption to be taxed at capital gains rates rather than ordering income tax rates
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qualifying stock redemption as a disproportionate redemption is often difficult and the case a sole
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owner is in fact impossible to achieve an esop on the other hand
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is very flexible and not limited by the rules that apply to stock redemptions the second reason why esops have become
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increasingly popular is that whether company is a c corporation or an s corporation
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an ethos can help a company to substantially eliminate the payment of federal and state income taxes
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on the earnings of the company i will discuss the techniques for doing this in more detail later in the session the
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third advantage of using esop is that in most cases you can continue to control your company just as you do
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now unlike a sailor merger you can create shareholder liquidity for yourself
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and for other shareholders of the company yet still retain control even after selling a majority of the
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outstanding stock to the esop the fourth advantage of using esop is that any monies
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the esau borrows in order to buy out the existing shareholders can be repaid entirely with tax
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deductible dollars that is to say the company will be able to deduct not only loan interest
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as can be done in the case of stock redemption but also the lone principle this is unique to esops 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 that esups have to offer there are now over 11 000 esops
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currently in existence and these ethos cover over 10 million participants it is estimated that the total value of
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all these up assets now exceeds 500 billion dollars now i’d like to talk about how eastops
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can be useful to owners of insurance agencies kyle what are the common ownership problems that are faced by owners and
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insurance agencies the common ownership problems are faced by owners of insurance agencies
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are in general the same problems are faced by all owners of privately held firms
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namely lack of liquidity lack of diversification and the need for succession plan
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fortunately the esop is one of the tools that could provide an answer to all three of these problems
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it can provide liquidity and diversification with existing owners and can also provide for an orderly
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business succession strategy as a liquidity tool esop offers a number
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of advantages the esop creates an in-house market whereby existing owners can sell their
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shares as and when they see fit unlike a sale or a merger an ethop
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allows the owners to sell part of their shares rather than having to sell the entire company thus
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the owners can sell their shares over a period of years rather than having to sell all at once since esop creates an
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in-house market no outside party is involved and there’s certainty of the outcome
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also the cost of arranging a sale to an esop is a fraction of the cost that would be
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incurred in a sale to a third party as a tool for investment diversification
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ethop allows you to diversify whatever amount of stock you wish to liquidate and invest in other investments such as
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cash fixed income securities or equities the mix of investment selection is entirely up to you
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as a tool for business succession etop is probably the least stressful method of ownership transfer due to the fact
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that it does not involve an outside buyer with an ethop there’s certainty of the outcome and there’s less likelihood of
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employee layoffs and or changes in management in fact an esop purchase can also be combined
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with the management buyout so that management can also acquire significant equity in the company
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the particular advantage that an esop offers is that it can provide for gradual change of ownership to the employees
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in the meantime the existing owners still retain the right to sell the entire company at a later date
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and still retain the right to control the company in the meantime kyle it’s easy to see that these stops
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offer a number of financial and tax advantages not offered by other alternatives but why is it that e-stops
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are especially popular with insurance agencies i think that ethos are especially popular with insurance
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agencies because these firms are by definition service businesses where the success and profitability of the firm depends
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almost entirely on the productivity of the employees another reason why ethos are so popular
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with insurance agencies is that as a general rule these type of firms prefer to be locally owned and
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operated unlike manufacturing and other industrial type of firms it is more common for insurance agencies
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to be acquired by their managers employees then to be acquired by a competitor a public company
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or by a financial buyer such as a buyout firm a third reason why insurance agencies utilize esops
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is that the etop can be a very useful tool in helping a company attract and hire high quality employees again
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professional employees are much more inclined to accept a job offer from a company that provides the opportunity for stock ownership
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than from a company that provides no such opportunity lastly ethos are popular among insurance
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agencies because these type of firms fully recognize that their professional associates are in fact their most
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valuable asset in the absence of an esop or a similar type of program
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there’s always a risk that the key employees will simply walk out the door and start up a competing company for all
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the foregoing reasons i think the nissan are especially good fits for insurance agencies
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in fact among our 2000 plus client base insurance agencies our second most frequent clients
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kyle given that e-stops are in general a good fit for insurance agencies are there any situations where an esop
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is not a good fit for an insurance agency yes there are a few situations where an ethop is not a good fit
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one situation would be where the firm is simply too small to have an esop as you know we have done esops for
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companies with as few as 10 employees and as many as 10 000 employees however
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usually not economical to install or maintain an esop if the company has fewer than 10 employees in addition
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if the company is an s corporation and has 10 or fewer employees it can often be difficult to comply with
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the so-called anti-abuse provisions that are set forth in section 409 p of the code if the company cannot comply
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with these provisions then it will either have to forego becoming esop or convert to c-corporation status
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the second situation where an esop is not a good fit is where the company is relatively new and not yet profitable
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in order for esop to be most effective the company needs to be profitable and paying taxes these stops are
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generally used for four principal purposes to create liquidity and diversification of sellers
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to increase employee productivity to increase company cash flow and to provide for business diversification
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let’s start by discussing how esop’s are used to create liquidity and diversification for sellers
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kyle how are esops typically structured to create liquidity and diversification for owners
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of insurance agencies pretty much the same way they are structured for any other types of firms
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how the east office structure depends on the goals and objectives of the current shareholders ethos can be
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extremely flexible in how they can be structured for shareholder liquidity purposes in general there are three basic ways an
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esop can be structured the first is what i call a pre-funded esop
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a pre-funded esop is one where the esop was established and the company makes contributions to
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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-funded etop as a way to generate current tax deductions
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and as a way to accumulate cash in the plan where for one reason or another the current shareholders are not yet
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willing to start selling their shares under the current code provisions a company is allowed to make
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tax-deductible contributions each year in any amount up to 25 percent
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of eligible payroll thus for example if the company’s eligible payroll is one
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million dollars it could make tax-deductible contributions of up to two hundred fifty thousand dollars per annum
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if the company contributed the maximum amount each year after a period of four years the plan
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would have accumulated a piggy bank of at least a million dollars in funds plus however much interest might be earned on these funds
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many times the company is already spending these funds in a 401k match or in a profit sharing contribution we
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should not have the same flexibility to invest in company stock the second way that an esop can be
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structured is this gradual esop a gradual esop is one where the company makes discretionary contributions each
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year up to the maximum deductible amount and uses these contributions to purchase shares from existing
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shareholders on a year-by-year basis the advantage of this approach is that it is highly flexible
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the company has complete discretion as to how much it contributes to the plan each year the advantage to selling shareholders is
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that they are only selling a small percentage of their stock from year to year however unlike a stock redemption each
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and every sale to the esop will qualify for favorable capital gains treatment
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in the case of c corporation once esop has acquired 30 or more of the outstanding stock then
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the sellers can also elect to defer indefinitely the taxation of their capital gains
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provided that certain conditions are met the third way that an esop can be structured is as a leveraged esop
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a leveraged esop structure is used where the shareholders want to cash out more quickly or in the
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case of c corporation want to immediately qualify for the tax deferral of their capital gains taxes
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as i mentioned earlier in order to qualify for the tax deferral esa must acquire at least 30 percent of
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the outstanding shares unless the plan has been pre-funded esop will usually have to be leveraged
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in order to have enough funds to purchase 30 of the outstanding stock and how is the plan leveraged does the
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plan borrow the money or does the company borrow the money good question let me explain this by
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giving a specific example let’s assume that we have a company with annual sales of 10 million dollars
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an eligible payroll of 1 million dollars pre-tax profits of 600 000 and a fair market value of three
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million dollars let’s further assume that the esop wants to purchase
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thirty percent of the outstanding stock for price of nine hundred thousand dollars the way this works is that the bank
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lends nine hundred thousand dollars to the company and the company then lends nine hundred thousand to the esop
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the esop then purchases thirty percent of the outstanding stock from the company shareholders for nine hundred thousand dollars in
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cash at the end of the year the company then makes a tax deductible
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cash contribution of the esop in an amount of up to 250 000 plus interest esop then uses that
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contribution to repay interest and principal on the company loan the company then repays the bank loan
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assuming that the sellers qualify under the tax to parole provisions they will wind up saving anywhere from
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135 thousand dollars to 180 000 in federal and state taxes depending on
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the state income tax rate of course these structures can be combined if useful and
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necessary case for for example combines the pre-funding and leveraging ideas
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of cases two and three in this slide for example you will note that the
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company pre-funded the eta for two years accumulating about four hundred thousand dollars of cash
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meanwhile the company grew from pair market value of three million dollars to three point three three million dollars
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at the end of the third year in order to reach the 30 threshold esop needs to own one million
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dollars of stock since 400 000 is already accumulated the required bank loan
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need only be six hundred thousand dollars which is three hundred thousand dollars less than would have been required if no
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pre-funding had occurred therefore the required loan is reduced by thirty three percent
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and the annual debt service is reduced by over eighty one thousand dollars a year
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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 ethel would purchase three percent at
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the end of the second year esop would hold seven percent at the end of the third year it would hold twelve
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percent each of these sales would be taxed at capital gains rates however the sale in year four would
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result in the esop owning 30 percent thus the seller would be able to elect the taxpay rollover
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with respect to the stocks sold to the esop in year four case six illustrates how an esop can be
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structured to accomplish a 100 percent esop buyout in most cases is not possible to obtain
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the financing to accomplish a 100 ethos bile in one fell swoop accordingly a 100 ethop buyout is
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usually structured as a two-stage esop buyout in the first stage
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for example ethop might be leveraged in an amount sufficient to buy 50 of the outstanding stock
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then after this loan has been paid down the plan can be re-leveraged in year four to buy the remaining 50 percent kyle
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what if there’s more than just one shareholder of the company what if there’s a majority shareholder and one or more minority
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shareholders can an esop offer to buy out the majority shareholder without also making the same offer to minority
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shareholders in most cases the shareholders will readily agree among themselves
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as to whether the esop is to be used to purchase part or all of the stock of a majority shareholder or part or all
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the stock of one or more of the minority shareholders or combination of the two however if for some reason the
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shareholders cannot agree amongst themselves then it’s typically the case that the esop will buy stock from all those
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shareholders on a pro rata basis you’ve mentioned earlier that in the case of a c corporation there is a
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special provision of 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 under section 1040 of the code
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if an esop acquires 30 or more of the stock of a privately held c corporation
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the capital gains tax on the amount of gain will be deferred provided that the seller reinvests a
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like amount of money in qualified replacement property within 12 months from the date of sale
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this tax referral will continue as long as the seller holds the qualified replacement property if the seller holds
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a property until his death then he will receive a step up in basis and the capital gains tax will be
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completely avoided this type of transaction is typically referred to as a tax-free rollover
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qualified replacement property consists of stocks or bonds of american corporations the corporation
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may be big or little public or private but they must be american the seller cannot invest in a mutual
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fund or in government securities unless he is willing to pay capital gains tax most sellers who elect a tax deferral
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wind up investing the proceeds in a diversified portfolio of corporate stocks and corporate bonds a seller can always
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sell part or all of his replacement securities later on the extent that he does so however he
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will have to pay the capital gains tax that was previously deferred as well as a tax on any subsequent
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appreciation as well kyle is there any way to avoid being locked into these replacement securities
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and having to hold the same securities until death yes there’s a relatively simple way around this problem
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and that is to purchase long-term esau bonds and then margin out eighty percent to ninety percent of the proceeds for
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example assume that a seller receives nine hundred thousand dollars from the sale of stock to the esop
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he or she can then purchase nine hundred thousand dollars worth of long-term esau bonds
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and this purchase would satisfy the requirement that seller must purchase qualified replacement securities the
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seller could then margin out say 720 000 of these proceeds and invest these funds
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as he or she sees fit kyle you’ve mentioned that the tax free
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roller provisions do not apply to shareholders of an s corporation are there any tax advantages that apply
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to an s-corporation that do not apply to c-corps yes as you know in the case of an s
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corporation all the earnings of the corporation are taxed at the shareholder level rather than the corporate level as you
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also know ethos extact exempt entity thus to the extent that the stock of an s
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corporation is owned by an esop part of the corporation’s earnings will be exempt from income tax
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in the case an s-corporation is 100 owned by an esop none of the corporation’s earnings will
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be subject to income tax ethos share of s-corporation earnings is also exempt
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from the unrelated business income tax there are only two disadvantages to s-corporation esops
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the principal disadvantage is that there’s no tax-free rollover available to the sellers they must pay
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their capital gains tax on sale a second disadvantage is that s corporation ethops
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must cover a broadly based group of employees under this test if disqualified persons on more than 50
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percent of what is called deemed owned shares then the esop share of earnings will be subject to the unrelated
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business income tax and the disqualified persons will be subject to certain excise taxes
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kylo ren due to the fact that in the case of s corporation esops the tax benefits accrue more for the benefit of
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the company itself rather than for the benefit of the selling shareholders are esop
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transactions structured differently for s-corporations than for c-corporations basically all the same transaction
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structures that are used by c corporations are also used by s-corporations
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as in the case of c-corporations with s-corporation esops some esops are structured as pre-funded
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esops some are structured as gradual esops where the esops purchase shares year by
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year and some are structured as leveraged esops however because of the fact that the
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company will be 100 tax exempt if the esop is a sole shareholder we’ve seen many more 100 percent esop buyouts
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of s corporations than we have seen in the case of c corporations also because of the difficulty of
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securing 100 bank financing for a buyout many of these transactions have been structured 1
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100 seller financing here’s an example of how leveraged ethos are typically
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structured for s corporations in this example the owner gary is a sole shareholder
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and pays themselves a salary of two hundred thousand dollars a year there are twenty other employees that have a total compensation of eight
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hundred thousand dollars so the gary’s compensation is twenty percent of the total payroll
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the company value is four million dollars case seven shows how the transaction
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will be financed with seller financing in this case gary becomes a banker himself
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by taking back an installment note from the esop here you will receive installment payments over the term of
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the notes as he receives the principal he will have to pay capital gains tax on the portion of the principal payment
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that represents gain and he will pay ordinary income tax on the interest portion but the
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important thing to point out is that esop now owns 100 of the company
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the company no longer has to pay any income taxes assuming a pre-tax profit of eight hundred thousand dollars
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this would result in a tax savings of over three hundred thousand dollars that would otherwise have been paid cash
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each and every year in taxes the same three hundred thousand dollars can be used instead
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to pay for a large portion of the installment payments that will be paid to gary each year on his installment notes this next slide
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illustrates two points with respect to leveraged esops first it illustrates how the debt is repaid
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in the case of an s-corporation the debt is repaid by having the company make tax-deductible contributions to the esop
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which esop then uses to make no payments to gary in the case of an s-corporation the debt
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can also be repaid by using s-corporations distributions that are paid to the esop
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and then used to make no payments to gary debt is repaid the same way in c corporations except that c corporations
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aren’t allowed to make s-corporation distributions to shareholders instead there’s a special code provision that
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allows c-corporations to pay called deductible dividends to the esop
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over and above tax deductible contributions normally c corporations don’t pay
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dividends because these dividends are not tax deductible in the case of an esop however if they
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are used to repay esop debt the dividends will be tax deductible the second point of this slide
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is to illustrate how stock is allocated in the case of a leveraged esop in the case of a gradual esop obviously
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the stock is allocated on a year-by-year basis as and when shares are purchased
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in the case of leverage z-stop the stock is allocated to participants as note payments are made thus if the
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ethos purchases 100 percent of the outstanding stock all the stock is initially held by the esop in a suspense account
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then each year the company makes contributions to the plan and the contributions are used to make
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no payments to seller or the bank lender if a bank is involved a pro rata portion of shares is released
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from the suspense account and allocated the accounts of the participants the block of stock that is
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released from the suspense account each year is then allocated among the accounts of the participants
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in proportion to covered compensation the other alternative for structuring a
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leveraged esop is to have the transaction finance with a bank loan rather than with a seller
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note thus if gary wants to receive cash right away for his stock then external bank financing would be
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required in order to put four million dollars of cash into gary’s pocket right away thus case eight is the same as k-7 with
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the exception that a bank is now involved the concept however is exactly the same esop owns 100 of the company
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therefore the company pays no taxes and the lender is being repaid with pre-tax dollars because the company
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is now exempt from paying any taxes whether the etop is bank finance or seller finance the results will be the
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same in either case first the company’s earnings will no longer be subject to income tax
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second gary will receive four million dollars and will pay capital gains tax on his gain
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third since gary’s compensation constituted twenty percent of the total covered compensation gary
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will be allocated twenty percent of stock within the esop and he will be able to cash that out later when he leaves the
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company you should note that this is a benefit that does not apply in the case of c-corporation
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where the seller has sold stock to the esop and elected the tax-free rollover treatment in that case there’s a special rule that
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prohibits the selling shareholder and related parties from receiving any allocation of the stock
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that was sold in the tax free rollover transaction fourth since the earnings of the company are no longer subject to income taxation
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the company no longer has to make distributions to the shareholders to enable them to pay their income taxes
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instead these funds can now be used to repay debt after the debt is repaid these funds can
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be accumulated in the company and used to make acquisitions or to otherwise fund growth and expansion
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so far we’ve talked about esop’s being used to create liquidity and diversification for the shareholders
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a second use of esops is to increase employee productivity
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sometimes the primary purpose for adopting an esop is to create a direct link between employee productivity and their
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retirement benefits it’s simply common sense that people work best when they work for themselves as they say no one ever washes a rental
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car the concept of an esop is to have the employees think and act like owners
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kyle the obvious question then arises do we soft in fact increase employee productivity yes
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numerous studies conducted over the past 17 years have all concluded that ethos increase company
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performance for example one of the early studies found that employee absenteeism went down by 66 percent
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and employee turnover went down by 50 percent after implementing an esop
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more recently there were two harvard business review studies that found that sales growth in esop companies was significantly higher
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than in comparable non-ethos 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
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that esop companies had a higher return on assets and a higher return on shareholders equity than comparable non-etop companies kyle
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what is the impact of increased employee productivity on profitability and the overall value of the company is
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the impact relatively nominal or is it significant the impact can be quite significant this
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slide illustrates for example that a two percent increase in productivity can literally result in a
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fifty percent increase in profitability in this case we assume that the company
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had 10 million dollars in revenues and a pre-tax profit of 400 000 as indicated if the sales force can
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increase revenues by 2 percent but whole expense is constant the pre-tax profit increases by
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50 percent another way that profitability could be increased by 50
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would be if the employees were able to reduce expenses by 2 percent while holding revenues constant of
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course the employees can both increase revenues by two percent and reduce expenses by two percent
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then the company would literally experience a hundred percent increase in profitability the third use of the new stock is to
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increase corporate cash flow this can be accomplished by simply having the company contribute newly
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issued stock or treasury stock to esop on a year by year basis result is to reduce corporate taxes and
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increase cash flow while simultaneously providing a retirement benefit for the company’s employees
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kyle what are the pros and cons of using an esop to increase company cash flow as you just mentioned
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the principal advantage of using esop to increase the cash flow is the company’s cash flow and net worth
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will be increased the potential disadvantage is that issuing new shares of stocks in esop will create dilution
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to original shareholders actually there’s no dilution if the contribution
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to esop is in lieu of cash bonuses or cash contributions that would be made to another former retirement plan
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as illustrated by this slide for example if the company contributes 300 000 worth of stock to the esop in lieu of
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300 000 401k matching contribution or a three hundred thousand dollar prop during contribution the company has
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in effect received three hundred thousand dollars of cash in exchange for three hundred thousand worth of stock
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if the company puts this money to good work the value of the company will increase that benefit of all shareholders
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if the company does not spend the money wisely then there will be a dilution of the shareholders equity
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the fourth use of a new stock is to create a succession plan for the existing shareholders
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in my view an esop transaction is the least stressful and most efficient means of transferring ownership to the next
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generation for three primary reasons first it utilizes pre-tax cash flow rather than
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after-tax cash flow second it’s usually done in stages and therefore involves less leverage
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and third it usually involves no change in management control at the outset in most cases there’s only a gradual
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change in management control over a long period of time kyle what is your view of an esop as a tool for
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business succession in the area of business succession and transition an esop on its own
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is usually not the sole answer to one’s objective for example many owners wish to reward their key
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employees as well as certain family members in addition to the ethoc participants stock sales can be made directly to the
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key group of employees and stock grants can be made to family members in many
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if not most cases we recommend creating a separate non-qualified management stock bonus
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plan that is created specifically for the key employees who will be responsible for the long-term growth
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and succession of the business powell we’ve talked about the various advantages of an esop
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what are the disadvantages of an esop there are several potential disadvantages of an esop
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depending on the facts and circumstances however in most cases the alleged disadvantages are more perceived than real
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one potential disadvantage of sale to an esop versus a sale to a third party is that any sales to an esop depends
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upon the ability of the company to obtain the necessary financing if a transaction is financed with a bank loan
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the company must have the ability to obtain the necessary bank loan based upon having sufficient cash flow
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to service a loan and sufficient assets to collateralize the loan if the company does not have sufficient collateral
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the seller may have to give a personal guarantee or may have to pledge a portion of the qualified replacement securities
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on the other hand a seller can always self-finance a sale in whole or in part if sufficient bank financing is not
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available another potential disadvantage of an esop sale is that the debt incurred to
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finance a transaction will reduce the company’s net worth this is no different than in the case of
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stock redemption or a management buyout and in most cases has little or no impact on the company’s
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operations the only case where this does have an impact is the case of construction companies
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that are required to obtain construction bonds if the company’s net worth is greatly diminished the company may
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have difficulty in obtaining the necessary bonding in general shares of construction companies should sell gradually over a
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period of years in order to avoid any sudden reduction in net worth
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shareholder resolution is another potential ease off disadvantage shareholder resolution comes about only
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if the ethos funded with newly issued shares of company stock since most esops are funded with cash
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which is used to purchase shares of existing stock rather than newly issued stock dilution seldom comes into play even if
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the ethop is funded with newly issued shares the dilution is usually not that significant as illustrated by this slide
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in fact if the cash flow savings are put to good use the dilution becomes an advantage rather
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than the disadvantage to the extent that it enables the shareholders to own a smaller piece of a bigger pie
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a common misperception is that an esop result in loss of control this is not true at all in an esop
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the board of directors appoints a controlling shareholder as a planned committee and trustee of the plan thus the
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controlling shareholders continue to vote the shares that he has sold to the plan as well as shares that he still owns outside of the
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plan the planned committee directs the voting of all of the esop shares on all
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ordinary issues such as the annual election of the board of directors thus
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there’s never any loss of control the only exception is that participants in the plan are
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allowed to vote on certain special issues the special issues that participants are allowed to vote on
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include only merger consolidation recapitalization liquidation or sales
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substantially all the corporate assets even on these special issues however the participants are only allowed to vote
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with respect to those shares that have been actually allocated to their accounts all unallocated shares are still voted by
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the trustee also participants do not vote upon any proposed sale of the stock to a third party since this is a
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fiduciary decision not a decision that requires a shareholder vote
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it is important to note that having esop does not take away any of the other shareholder liquidity options the
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controlling shareholder can still sell his remaining non-esop shares to a third party and the planned committee can still
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elect to sell all of the ethos shares to a third party another misperception is that having
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esop will require the company to disclose confidential financial information again
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this is not at all true the only disclosure that are required are the participants must be furnished with an
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annual benefit statement which discloses their total account balance their percentage vested
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and the per share value of the stock having esop does not expose the trustees
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of any greater degree of fiduciary liability than they would have as trustees of a pension or professional plan in fact the
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fiduciary liability is somewhat less since the trustees of esop are exempt from the normal requirements
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to earn a fair rate of return to diversify the investments and provide investment liquidity
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yet another misperception is that having esop creates a repurchase liability for the stock that
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is acquired by the esop the fact of the matter is all stock ultimately will need to be repurchased
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that is why stock has value the difference is that in an esop the repurchase of such stock will be
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spread out over the lives of all the planned participants and will be made with tax deductible
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dollars whereas in the case of 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
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lastly it should be noted that selling to an esop unlike merger or sale to a third party
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is not an irreversible decision if you later change your mind esop can be terminated
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and all the shares can be distributed and repurchased in the alternative esop can be frozen and the shares can be
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gradually repurchased as employees die and retire thanks kyle
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minkin associates is a specialist in employee stock ownership plan design installation administration and
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evaluation and associates has been designing esop since 1974 and we offer a full spectrum of esop
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services the design installation services provided by minkin associates
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include preparation of the formal business appraisal of 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 employee communication booklets conducting powerpoint presentations for the employees
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and assistance in setting up the accounting and administration systems required for the plan
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on an annual basis minikin associates also provides the annual record-keeping services including
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the preparation of individual employee benefit statements an additional service that is required annually is the update of the stock
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appraisal in order to report to the employees the value of their retirement plan as well as to establish the values
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should the stop buy a second or third block of stock it’s critical to use an esop firm that’s
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a specialist in this area with an experienced sperm fully stop services will be provided
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at less cost to the client and there will be fewer errors incurred in the process
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lincoln associates have designed over 2000 esops since our inception in 1974 we are the nation’s
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number one firm in esop activity and can associates is headquartered in san francisco
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with offices in los angeles portland chicago atlanta and wilmington delaware
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our appraisers are located throughout the country as well but how do you know if your business is
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an appropriate candidate for an e-stop just take a few minutes to complete the confidential feasibility questionnaire
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form that’s on our website at www.minke.com
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fax or email this information back to our home office and we will then give you a call to discuss our findings and
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the feasibility of an esop to accomplish your objectives again if you’d like to have us perform a
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free preliminary analysis please give us a call at 800 347
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or you can complete the questionnaire form by clicking the button at the top of the screen thank you for
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viewing our esop seminar and again we look forward to talking with you at your earliest
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convenience
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you