ESOP: The Ultimate Instrument in Succession Planning

Transcription

1 2008 AGI-Information Management Consultants May be used for personal purporses only or by libraries associated to dandelon.com network. ESOP: The Ultimate Instrument in Succession Planning SECOND EDITION Robert A. Frisch John Wiley & Sons, Inc. New York Chichester Weinheim Brisbane Singapore Toronto

2 Contents Chapter 1 Historical Background of ESOPs Chapter 2 The Magic of ESOPs Why ESOPs Are an Instrument of Succession Planning How an ESOP Can Create a Market for a Stockholder's Stock How a Corporation Can Cut the Cost of Borrowing Nearly in Half ESOPs What they Really Are ESOP The Ideal Financial Machine Advantages Generally Congressional Backing ESOP A Misunderstood Program Cost to Implement and Administer ESOPs 11 Chapter 3 The Environment for ESOPs The ESOP Concept Slow Early Days of ESOPs Real Social Security through ESOPs ESOPs and Motivation The Use of ESOPs to Save Jobs 16 Chapter 4 Exit Alternatives for Owners of Private Corporations The Preamble to Ownership Transition Selling the Company to an Outside Buyer 18

3 4.3 The Initial Public Offering Alternative The Management Buyout Alternative The ESOP Alternative 20 Chapter 5 Planning for Succession 23 Chapter 6 ESOP versus Going Public versus Selling the Company Going Public Leveraged ESOP Loan versus Public Equity Financing Selling to Outsiders Selling to an ESOP 29 Chapter 7 How You Can Defer or Avoid All Taxes by Selling Some or All Your Private Company to Employees The Tax-Deferred Stock Rollover Stock That Is Eligible for the Nonrecognition Sale ESOP Three-Year Holding Requirement Qualified Replacement Property Floating Rate Note How to Create an Actively Traded Portfolio with a Floating Rate Note How to Bootstrap a Seller-Financed ESOP Allocation Eligibility Procedures for Nontax Recognition on Stock Sale The Corporation's Consent to the Nontax Recognition How to Achieve Tax Nonrecognition with Less Bank Leverage Tax Nonrecognition on an Installment Sale Tax Requirements for the Tax-Deferred Rollout Selling the Company to Outsiders 41 Chapter 8 How to Value the Stock of a Closely Held Company Why Have a Valuation? Independence of the Appraiser Adequate Consideration The Valuation Report Contents Methods for Valuing Stock Fairness Opinion Control Premium, Minority Discounts, and Marketability Discounts 50 xvi

4 8.8 Information the Appraiser Needs Summary 53 Chapter 9 Eligibility for ESOP Participation Eligibility 55 Chapter 10 How to Fund an ESOP at Zero Net Outlay 59 Chapter 11 Contribution and Allocation Parameters of the ESOP Employer Contribution Limits Eligible Compensation Employer Contribution Limits to a Nonleveraged ESOP Combination ESOP Leveraged ESOP Dividends Contribution Limits on ESOPs in Conjunction with Other Qualified Plans Allocating the Benefits Allocation Exclusions Family Members Who Are Prohibited from Participation Family Members Who Can Participate in the Allocation Stockholders Who Own More Than 25 Percent of the Sponsor's Stock Directly or by Attribution How to Determine if One Owns More Than 25 Percent 68 Chapter 12 ESOPs for Subchapter S Corporations Introduction Tax Flowthrough Attributes of S Corporations Unavailability of the 1042 Tax-Deferred Rollover Dividend Deductibility Leveraged S Corporation ESOPs Distributions to Terminated Participants Prohibited Transaction Rules Subchapter S Corporation ESOPs as an Employee Benefit Conversion S to C/C to S Corporation Subchapter S Corporation ESOP Strategies 75 Chapter 13 How ESOPs Can Increase Working Capital and Cash Flow 79

5 Chapter 14 How to Increase Working Capital and Cash Flow by Converting a Profit-Sharing Plan or Pension Plan to an ESOP Partial Conversion Converting the Profit-Sharing Plan 82 Chapter 15 How to Convert or Terminate an ESOP 87 Chapter 16 Vesting Benefits 89 Chapter 17 Distributing the ESOP Benefits Leveraged Distribution Rules Distribution Methods Nonleveraged Distribution Rules Liberal Distribution Practice Diversification Rules How to Diversify the Accounts Dividend Distribution Withholding Put Option Buy-Sell Agreements Distribution of Account Balances Tax on Distributions and Rollovers The Distribution Policy The Asset Diversification Exemption Withholding Tax to the Participant 100 Chapter 18 Deductible Dividends Only Through ESOPs How Your Corporation Can Deduct Dividends to Service Debt Passing the Dividend Through to Employees 102 Chapter 19 ESOP Account Diversification Rules Introduction The De Minimis Rule Implementing the Diversification Elections 106.xviii.

6 Chapter 20 Leveraged Buyouts and the ESOP Leveraged Buyouts Leveraging the Leveraged Buyout with an ESOP Public Company Division Divestiture Use of ESOPs in Corporate Divestitures The MBO/ESOP Mechanics Dilutionary Offsets 114 Chapter 21 The Leveraged ESOP for Business Succession The Dilemma of Nonliquid Stock Ownership How a Private Company Owner Can Provide for Successorship Through a Leveraged Buyout 117 Chapter 22 How an ESOP Can Make a Leveraged Management Buyout Company Healthier How ESOPs Increase Corporate Value 122 Chapter 23 ESOPs and Total Succession Planning : Why Total Succession Planning Is a Must for Private Company Owners Hurdles of Transferring Ownership The Loyalty Factor The Need for a Successor Preparing a Succession Plan Succession and Exit Plan Components What is a Total Succession Plan? The ESOP as a Cornerstone for Total Succession Planning Prefunding the ESOP Moving Closer to Succession 128 Chapter 24 ESOP A Practical Means to Succession Planning Case Study Using Minority and Marketability Discounts for a Gift How to Maximize Net Investment Return Wealth Replacement Trust ESOP The All-in-One Succession Planning Device 131

7 Chapter 25 The Amazing Leveraged ESOPs The ABCs of a Leveraged ESOP Transaction How a Leveraged ESOP Can Cash Out a Stockholder Corporate Non-ESOP Loan Compared with a Leveraged ESOP Loan The Cost Effective ESOP Loan 137 Chapter 26 The Management Leveraged ESOP Buyout Selling a Division to the Employees through a Leveraged ESOP Buyout Doing the Deal How ESOP Divestitures Can Enhance Succession Planning Management Groups as Acquirers The Leveraged ESOP Divestiture 142 Chapter 27 ESOP Techniques to Acquire Competitors, Suppliers, and Other Corporations with Tax Benefits to Buyer and Seller Acquisition Technique 1: Buying Target, Inc., Stock or Assets and Deducting the Cost Acquisition Technique 2: Post-Transition ESOP Acquisition Technique 3: How to Acquire the Target Company with Pretax Dollars and Give Tax Benefits to the Seller The Loyalty Card Steps to the Acquisition Strategy Result of Transaction Acquisition Technique 4: How a Selling Stockholder Can Acquire a Corporation with Tax-Free Dollars Result of the Transaction 153 Chapter 28 How an ESOP Can Help You Create a Miniconglomerate What to Look for in Selecting an ESOP Acquisition Target What Prospective Lenders Look for in Financing an Acquisition How to Structure Sequential ESOP Acquisitions How to Sweeten the Acquisition for the Seller 159 Chapter 29 Strategies for Investing the ESOP Rollover The Floating Rate Note Selecting the Portfolio 162

8 29.3 Maximizing Income the Charitable Way Summary 163 Chapter 30 Seven Practical ESOP Exit Strategies Technique 1: Prefunding the ESOP Technique 2: How to Sell Stock Under Section 1042 but Avoid Leverage Technique 3: Self-Banking the Stock Sale Technique 4: The Cashless Transaction Technique 5: Corporation Wants Cashless Tax Deduction and Minimum Dilution Technique 6: How Contribution of Redeemed Shares Can Minimize Dilution Technique 7: How to Deduct Principal on an Existing Loan The Flip Side of Antidilution 170 Chapter 31 How to Change Real Estate to Stock to Tax-Free Cash 171 Chapter 32 How Mr. Big Sold His Company Tax Free and Still Kept It The Locked-In Stock How to Cash Out the Private Company Stock The Cashing Out Procedure Leveraging the Transaction The Tax-Deferred (Possibly Tax-Free) Rollout 175 Chapter 33 What Lenders Look for in an ESOP Loan Lender's Criteria Analyze the Documents Fraudulent Conveyance Repurchase Liability Study 179 Chapter 34 How to Obtain Financing for the ESOP Who Provides the Financing? How a Lender Evaluates the Loan Other Factors for Analysis Real Value versus Cosmetic Effect 183 Chapter 35 How to Recover Taxes Paid in Prior Years with No Cash Expenditures 185 xxi

9 Chapter 36 Valuing Leveraged ESOP Stock Valuation in a Management Buyout Example ESOP Transactions Involving Multi-Investors 189 Chapter 37 Issues in Selecting a Valuation Firm Fiduciaries Select the Valuation Firm Frequency of Appraisals Multistock Transactions Due Diligence in Selecting a Valuation Firm What a Business Valuation Report Should Cover Summary 194 Chapter 38 Cashing Out through a Nonleveraged ESOP How Mr. Big Can Remove His Capital, Retain Control, and Perpetuate the Company How to Feel Loved and Needed after Selling the Company Keep Control 197 Chapter 39 Strategies for Selling an ESOP Company to Outsiders 199 Chapter 40 The Mature ESOP Company Giving a Piece of the Pie to New Employees Planning for Repurchase Liability The Stagnating Company Participative Management Cooperative Governance Issues in ESOP Companies 204 Chapter 41 How and Why to Keep, Freeze, or Terminate an ESOP Reasons to Keep the ESOP Active Freezing the ESOP Terminating the ESOP 209 Chapter 42 The Emerging Repurchase Liability How the Put Option Affects Repurchase Liability How the Repurchase Liability Affects Valuation Repurchasing the Stock 212. xxii

10 42.4 Whether to Redeem or Recycle the Shares A Funding Program That Won't Work The Repurchase Liability Study A Funding Program That Will Work Methods of Funding the Repurchase Liability Summary 216 Chapter 43 The Charitable ESOP How to Get a 200 Percent Personal and Corporate Tax Deduction on Your Charitable Gift and Other Strategies Tax Effect on the Donor Tax Effect on the Corporation The Charitable Remainder Trust CHESOP Charitable Gift Annuity CHESOP Pooled Income Fund Buyout Arrangement Charitable Lead Trust ESOP Buyout 223 Chapter 44 Mixing and Matching ESOPs with Other Qualified Plans Contribution Limits Plan Characteristic Differences How the 401 (k) Works with an ESOP 227 Chapter 45 ESOPs as an Executive Benefit in Combination with Nonqualified Non-Equity Incentive Plans Designing the Incentive Plan Providing the Cash to the Corporation for a SERP The ESOP as a Compensation Plan 237 Chapter 46 Equity Participation Planning Introduction Stock Options Incentive Stock Option Plan ISO Tax Treatment Nonqualified Stock Option Plan NSO Tax Treatment Stock Options An Employee Win/No Lose Deal Vesting of the Options Stock Options for Employees of Closely Held Companies Determining Stock Value for Private Company Options 243.xxiii.

11 46.11 Pros and Cons for Stock Options in Private Companies Direct Stock Purchase Programs Stock Purchase Plans under Code Section Securities Issues The Nonqualified Stock Bonus Plan Restricted Stock Plan Employee Stock Ownership Plans Summary 248 Chapter 47 Profiles of Likely Candidates for ESOPs 249 Chapter 48 Security Law and the ESOP Simplifying Securities Compliance Antifraud Regulations Registration Exemptions Stock Offerings to Sophisticated or Accredited Investors Public Company ESOPs Blue Sky Laws 254 Chapter 49 Fiduciary Considerations Those Who Are Not Fiduciaries Investment Diversification and Fair Return Exemption Exclusive Benefit of Participants Trustee Selection ESOP as a Takeover Defense Multi-Investor Leveraged Buyouts Adequate Consideration 258 Chapter 50 How to Communicate ESOP Benefits to Employees for Greater Public Relations Building the Ownership Culture 261 Chapter 51 ESOPs for Lending Institutions Why a Bank or a Savings and Loan Should Adopt an ESOP ESOPs and Banks as Estate Trustees ESOPs for Federal Savings and Loans S&L as an Affiliated Person Equity Commitment Notes as Regulatory Capital 266

12 Chapter 52 ESOP Disadvantages, Problems, and Solutions Problems Dilutionary Effect of Pensions and Profit-Sharing Plans 271 Chapter 53 The ESOP Implementation Procedure Feasibility Study Steps to Adopting an ESOP The ESOP after Year One 277 Chapter 54 Accounting Basics How Contributions to a Nonleveraged ESOP Are Treated Accounting for Dividends Reporting ESOP Loans on the Financial Statement Recording the Purchase and Release of ESOP Stock Earnings per Share 281 Chapter 55 Meet Some ESOP Companies Case History Capsules 283 Chapter 56 Driving Share Value for Small to Medium-Sized Companies Turning Turkeys into Improved Organizational Performance and Increased Share Value Driving Share Value an Example Reviving the Mature ESOP 293 Chapter 57 The Driving Share Value Program for Larger ESOP Companies The Larger Company Employee Owner Driving Share Value Groups (DSVGs) Establishing DSVGs DSVGs Not a Replacement for Management Driving Share Value Groups Formation Checklist The Senior Management/Employee Owner DSVG Committee Implementation Checklist Summary 302

13 Chapter 58 Participative Management The Transition to the Ownership Culture Creating an Ownership Culture Components of the Ownership Culture Summary 309 Chapter 59 Governance Issues in ESOP Companies Introduction Impact on Employees of the First ESOP Transaction How to Avoid Creating Two Classes of Employees 313 Chapter 60 Succession Planning Case Histories Introduction Case 1: The Parents Who Wanted to Be Fair Case 2: Transition Plan for Owners with Different Goals Case 3: Transition Using a CHESOP Case 4: The Multistockholder Buyout Case 5: The Management Buyout of a Division 327 Chapter 61 Companies That Should Not Have an ESOP ESOP Noncandidates Rules of Thumb 331 Chapter 62 The Perfect Exit Maximize Tax Benefit to Selling Shareholder and to the Corporation Exit Strategy Floating Rate Note How the Company Can Operate Tax-Free Summary 335 Chapter 63 Administration Policy Regarding Self-Correction A Reprieve for Past Errors Introduction Eligibility of Use APRSC Summary 339 Chapter 64 The Free ESOP Information Hotline ESOP (3767) 341 Index 343