7th Annual Vermont Employee
         Ownership Conference
             June 5, 2009

          The Family Business and
   ...
Goals of the Presentation
• Provide an overview of the challenges facing
  family-owned businesses in transition
• Outline...
Legal Disclosure

• To ensure compliance with requirements imposed by the IRS, we must inform
  you that any U.S. tax advi...
Tax Issues Facing Family Business
                Owners
• Estate tax at federal and state level and the
  liquidity to pa...
Tax Issues Facing Family Business
                 Owners
• Estate tax:
 – Federal exemption at $3.5mm this year. Next yea...
Tax Issues Facing Family Business
                 Owners
• Income taxes:
 – Growing federal deficit
 – Troubles with Medi...
Tax Issues Facing Family Business
                Owners
• C corporations
 – Double tax on property in the company
 – Used...
Fairness Issues
     Facing Family Business Owners
• Family in and out of business
 – Wealth tends to be tied up in busine...
Fairness Issues
     Facing Family Business Owners
• Addressing the equity issues
 – Other assets
 – Life insurance
 – Usi...
Fairness Issues
     Facing Family Business Owners
• Using ESOP liquidity
 – Pass on to non-working family members
 – Liqu...
Fairness Issues
     Facing Family Business Owners
• Charitably inclined owners
 – Do not want to leave part of the busine...
Family Business Facts

• More than 30% of all family owned businesses survive
  into the second generation;
• 12% will sti...
The Three Circle Model


          Business




Family                     Ownership




          Business Savvy
The Developmental Stages of the
               Ownership System
           Ownership
                                     ...
Stages of Ownership

Sibling
Partnership
                   Sibling Owner                          Sibling Owner



Cousin...
What makes family business unique?


• The presence of family
• The owners dream to keep it in the family – continuity
• T...
Unique challenges facing
               family business

• Unqualified family members in key positions within the
  compan...
Strength of family firms & ESOP’s

•   Concern for the long run that measures results over decades
•   Commitment to quali...
Some pitfalls of family business
                     and ESOP’s
• Interest or competence of employees to own & run the bu...
Vermont Systems, Inc.
Vermont Systems, Inc.

– Our Counts Before the ESOP
  • Employees
  • Gross Revenues
  • Net Income
Vermont Systems, Inc.

– Our Counts After the ESOP
   • Employees - -
   • Gross Revenues - -
   • Net Income - -
– Percen...
Case Study for Discussion

• Three children in family, one in business while
  two are not
• Business worth $5mm
• Owners ...
Case Study for Discussion

• Thoughts:
 – Partial ESOP to create liquidity at $2mm
 – Also use Seller financing with Warra...
Why Might Owners of a Family
        Business Consider an ESOP?
• Employees also seen as family.
• Way to create equity in...
Is an ESOP Right for You?
• Consider the complexity, the initial costs, and annual
  costs.
• Consider objectives of curre...
What Family Businesses
             Might Use an ESOP?
• Generally profitable companies of more than 20
  employees and pa...
Questions?
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Family Businesses And ESOPs

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The Family Business and Employee Ownership
Steve Magowan, Steiker, Fischer, Edwards & Greenapple PC
Dann Van Der Vliet, University of Vermont
Giles Willey, Vermont Systems
Can an ESOP work in a family-owned business that wants to maintain aspects of family ownership? What are the issues that are unique to this situation? This session will review how ESOPs and family ownership can work together to enhance family succession planning – including estate planning – and to reward employees. The experience of a very successful Vermont family-based ESOP company will be explored.

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Family Businesses And ESOPs

  1. 1. 7th Annual Vermont Employee Ownership Conference June 5, 2009 The Family Business and Employee Ownership Stephen Magowan, Steiker, Fischer, Edwards & Greenapple, P.C. Dann Van Der Vliet, Vermont Family Business Initiative Giles Willey, Vermont Systems, Inc.
  2. 2. Goals of the Presentation • Provide an overview of the challenges facing family-owned businesses in transition • Outline fundamental tax and succession issues facing family-owned businesses • Review the Vermont Systems, Inc. path to succession through an ESOP • Discuss the model of family succession with an ESOP. • Answer your questions!
  3. 3. Legal Disclosure • To ensure compliance with requirements imposed by the IRS, we must inform you that any U.S. tax advice contained in this presentation is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication.
  4. 4. Tax Issues Facing Family Business Owners • Estate tax at federal and state level and the liquidity to pay the tax • Pass through income and income taxes associated with Subchapter S, partnership and limited liability company profits • C corporation issues if real estate held in corporation
  5. 5. Tax Issues Facing Family Business Owners • Estate tax: – Federal exemption at $3.5mm this year. Next year? – Vermont exemption – Legislation passed to reduce the exemption to $2mm.
  6. 6. Tax Issues Facing Family Business Owners • Income taxes: – Growing federal deficit – Troubles with Medicare and Social Security – Will taxes go up? (Or is it only a question of how high?) • Higher income taxes impacts ability of buyers (including family buyers) to raise funds over time to do the buy out – Double, triple and quadruple tax conundrums
  7. 7. Tax Issues Facing Family Business Owners • C corporations – Double tax on property in the company – Used in preferred stock settings – Challenging tax environment for small businesses
  8. 8. Fairness Issues Facing Family Business Owners • Family in and out of business – Wealth tends to be tied up in business – Most families desire to treat children evenly – Having non working family owners with working family owners can be a problem
  9. 9. Fairness Issues Facing Family Business Owners • Addressing the equity issues – Other assets – Life insurance – Using ESOP to create liquidity for some of the stock
  10. 10. Fairness Issues Facing Family Business Owners • Using ESOP liquidity – Pass on to non-working family members – Liquidity for life insurance – Warrants from a transaction
  11. 11. Fairness Issues Facing Family Business Owners • Charitably inclined owners – Do not want to leave part of the business to charity – ESOP can be used to create liquidity to fund charitable interests through charitable remainder trust or other vehicles or direct gifts
  12. 12. Family Business Facts • More than 30% of all family owned businesses survive into the second generation; • 12% will still be viable into the third generation; • Only 3% of all family businesses survive into the fourth generation level and beyond. WHY? Business Savvy
  13. 13. The Three Circle Model Business Family Ownership Business Savvy
  14. 14. The Developmental Stages of the Ownership System Ownership Cousin Consortium Sibling Partnership Family Business Controlling Owner Business Savvy
  15. 15. Stages of Ownership Sibling Partnership Sibling Owner Sibling Owner Cousin Consortium As offspring mature, a “cousin consortium” develops. Cousins come from different family structures and experiences. Business Savvy
  16. 16. What makes family business unique? • The presence of family • The owners dream to keep it in the family – continuity • The overlap of: – Family – Ownership – Management • Unique sources of competitive advantage derived from interaction of family, ownership and management, especially when family unity is high. Business Savvy
  17. 17. Unique challenges facing family business • Unqualified family members in key positions within the company. • Communication of business issues is difficult enough, however layered with challenging family matters, often communication completely breaks down. • Marriage and divorce plays a key role in family business success and failure. • Involvement of family members not employed by the company. • Family members in ownership versus management positions. Business Savvy
  18. 18. Strength of family firms & ESOP’s • Concern for the long run that measures results over decades • Commitment to quality • Emphasis on maintaining the value of the family name – “legacy” • High level of concern and caring for the needs of the employees Source: Weiser, Brody & Quarrey “Family Business and Employee Ownership” (1988)
  19. 19. Some pitfalls of family business and ESOP’s • Interest or competence of employees to own & run the business • Size of business – Is the value per share significant enough • Disclosure and open management • What is the real health of the business? • Family unity or “fusion” Source: Weiser, Brody & Quarrey “Family Business and Employee Ownership” (1988)
  20. 20. Vermont Systems, Inc.
  21. 21. Vermont Systems, Inc. – Our Counts Before the ESOP • Employees • Gross Revenues • Net Income
  22. 22. Vermont Systems, Inc. – Our Counts After the ESOP • Employees - - • Gross Revenues - - • Net Income - - – Percentage Growth in Value of the Company since 1999: • _____%
  23. 23. Case Study for Discussion • Three children in family, one in business while two are not • Business worth $5mm • Owners have little outside net worth except for retirement plan that they expect to use in retirement
  24. 24. Case Study for Discussion • Thoughts: – Partial ESOP to create liquidity at $2mm – Also use Seller financing with Warrants either to pass equity growth to working side or to grandchildren – Stock Appreciation Rights Plan inside company • Need to be wary of Code Section 409(p)!
  25. 25. Why Might Owners of a Family Business Consider an ESOP? • Employees also seen as family. • Way to create equity interest for non-family management without transferring stock directly. • Tax, succession planning or diversification reasons. • It is a way to convert some of the business equity to cash to fund retirement and to create a pot of liquidity that might pass to family that is not in business. • Root jobs in the community. • Improve the bottom line by creating ownership mentality.
  26. 26. Is an ESOP Right for You? • Consider the complexity, the initial costs, and annual costs. • Consider objectives of current and successor family shareholders and management. • Look at tax savings/benefits for C-Corp vs. S-Corp ESOPs. • Consider whether family can accept an “outside” shareholder. • But, in some instances, an ESOP can be very helpful for the right family business.
  27. 27. What Family Businesses Might Use an ESOP? • Generally profitable companies of more than 20 employees and payroll > $750K. • Need good free cash flow. • An interest in employee involvement is a plus. • Owners typically looking to cut back and/or diversify. • Value greater than $1.0mm
  28. 28. Questions?

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