Presented by:

Matt Schubring

Managing Director

612-230-3122

matt.schubring@chartwellfa.com

www.chartwellfa.com

Assessing the Feasibility of an ESOP

The S Corporation ESOP Seminar

• Long-term look at the Company

• Addresses different elements of the

transaction

• Intangibles

• Financial

• Legal

Why a Feasibility Analysis

• Current Ownership Characteristics

• Family business lacking a “next

generation”, and/or looking to realize

liquidity prior to transitioning management

to family or non-family management

• “Diffuse” ownership group looking to

consolidate control and align interest in

growing the Company

• “Segmented” professionals looking for a

tax efficient means of delivering employee

ownership similar to a partnership

Why a Feasibility Analysis

• Company Business Characteristics

• Predictable, recurring revenue streams

that could support leverage placed on

the business

• Sufficient employee base (in number and

aggregate compensation) that could

benefit from employee-ownership

• Manageable prospective capital

expenditure requirements not

necessitating substantial additional 3rd

party capital

Characteristics of a Good ESOP Candidate

• Identified ESOP Objectives

• Create and realize employee retirement

benefits, cultural improvements, and

operational efficiencies

• Protect the shareholders’ legacy and

Company heritage while realizing liquidity

• Company desiring to utilize corporate tax

savings to increase growth and

accelerate debt repayment

• Shareholders looking to defer capital gains

taxation

Characteristics of a Good ESOP Candidate

• Valuation Expectations

• ESOPs cannot pay more than fair market

value

• Is the Valuation Expectation –

• Realistic given current M&A market

dynamics?

• Supported by past Company performance?

• Based on defendable Company

projections?

• Reflective of broader industry trends?

Establishing/Identifying Shareholder

Expectations

• Liquidity requirements

• Most ESOP transactions require the seller to

receive a note (the “seller note”) as partial

payment for their stock

• Sources of payment: cash vs. seller note

• Seller notes

Establishing/Identifying Shareholder

Expectations

• Post-Closing Governance

• Involvement in the business post

transaction

• “Control” at the Board of Directors Level

• “Control” at the Management Level

• Preservation of the:

• Shareholders’ legacy

• Company/Community jobs

• Presence/Status in the geographic or

industry community

Establishing/Identifying Shareholder

Expectations

• DOL skepticism regarding valuations

undertaken in connection with the

establishment of an ESOP has led to

significant oversight and articulated

“requirements”

• Fiduciary Process Agreement (FPA) entered

into by GreatBanc Trust Company (2014)

• Evolving landscape regarding the

feasibility analysis has changed both the

players involved in this process and the

methods by which information is reviewed

for these purposes

Evolving DOL Guidance…

• Company Providers

• Historically an “Exploratory Committee”

reviewed the possibility of an ESOP

transaction

• FPA: The Trustee will not use a valuation

advisor for a transaction that has

previously performed work – including but

not limited to a “preliminary valuation” –

for or on behalf of the ESOP sponsor

Conflicts of Interest

• Who are the sellers?

• Participation in the business vs. absentee

owners

• Development of projections/financials on

which the valuation is based

• Historical financials

• Quality of Earning’s Analysis

• Basis for projections….

• FPA impact on this process

Conflicts of Interest

• Review of Projections/Determining

Reasonableness of Projections• Comparison to historical results

• Comparison to comparable companies’ historical results

• Industry review and evaluation of projected company vs. market growth

• Impact of recession on historical results and implied

potential impact on projections

• Accounting for anticipated capital expenditures, both

cash outlay and anticipate return on investment

• Use of cash and impact on the Company’s working

capital

• Discussion of FPA standards/concerns for

projections

Valuation Considerations/Evaluations

• Company “Side” Actors

• Company Financial Advisor

• Company / Personal Counsel

• Other Company Service Providers

• ESOP Trustee “Side” Actors

• ESOP Trustee

• ESOP Trustee Counsel

• ESOP Trustee Financial Advisor

Putting Together the Transaction Team/Timeline

• Timeline

• Company advisors

• ESOP advisors

Putting Together the Transaction Team/Timeline

• Contemplating Transaction

Structure/Identifying Drivers

• Understanding risks and rewards of

various transaction structures

Preparing for a Transaction

(What Should I Be Doing Now?)

• Clean Up Financials

• Understand Other Opportunities

• Impact of other valuations/letter of intent

• Exploring third party buyers prior

to/coincident with ESOP transaction

Preparing for a Transaction

(What Should I Be Doing Now?)

• Management Evaluation

• Sellers need to evaluate management

teams.

• Tools to Drive Performance

Build/Secure the Management Team

• Inform advisors of long term plans and

goals so that they can be incorporated

into the transaction strategy

Impact of Personal Planning Decisions

• Articles of Incorporation

• By-laws/Regulations

• Buy-sell agreements/right of first refusal

requirements

• Timelines imposed by contractual

agreements

• Vendor/customer Consents

Understand Your Corporate Documents

Matt Schubring, ASA

Matt leads Chartwell’s ESOP & ERISA valuation

practice. He has provided financial advisory

services to privately held companies for over

15 years and is an expert on valuation issues

related to Employee Stock Ownership Plans

and ESOP sustainability. He advises clients on a wide variety of corporate finance,

valuation, tax, and fairness issues for ESOPs,

mergers & acquisitions, divestitures, and

general corporate related purposes. His

valuation opinions have withstood scrutiny by

the Internal Revenue Service and the

Department of Labor. Matt is an active

member of The ESOP Association where he serves as an associate member of the Valuation Committee.

Matt Schubring

Chartwell

33 South 6th Street, Suite 4750

Minneapolis, MN 55402

612-230-3122

matt.schubring@chartwellfa.com

www.chartwellfa.com

Questions ?