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Wintrust ESOPS

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Wintrust Financial breakout session at the 2018 Hot Firm conference in Dallas, TX.

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Wintrust ESOPS

  1. 1. ALL ABOUT ESOPS Patrick J. Stoltz Managing Director ESOP Finance pstoltz@wintrust.com | 847-768-9947 James E. Swabowski Senior Vice President ESOP Finance jswabowski@wintrust.com | 847-768-9964 Matt Doucet Group Senior Vice President Construction, Engineering & Architectural Division madoucet@Wintrust.com | 847-939-9320
  2. 2. 2Banking products provided by Wintrust Financial Corp. banks. CONTENTS I. What and Why? II. Financing an ESOP III. Company Preparation IV. Common Questions V. Addendum I. Mechanics of an ESOP II. Speaker Information III. Introduction to Wintrust IV. IRS Circular 230 Disclosure A L L A B O U T E S O P S
  3. 3. 3 W H A T A N D W H Y ?
  4. 4. 4Banking products provided by Wintrust Financial Corp. banks. WHAT IS AN ESOP? An Employee Stock Ownership Plan (“ESOP”) is a qualified, defined contribution retirement plan that invests primarily in employer stock. Used for: • Succession Planning • Employee Rewards • Building Entrepreneurial Culture Tax Benefits for: • Selling Shareholder • Company W H A T A N D W H Y ?
  5. 5. 5Banking products provided by Wintrust Financial Corp. banks. S-Corporations: • As with all S-Corporations, ownership is responsible for tax obligations (rather than being a company obligation); however, an ESOP is a tax-exempt employee benefit plan. – A 100% S-Corp. ESOP is exempt from federal and, in most cases, state taxes. C-Corporations: • Reduce taxable income with contributions to the ESOP – Often, these contributions are a non-cash expense • Reduce taxable income with tax-deductible dividends W H A T A N D W H Y ? COMPANY TAX BENEFITS
  6. 6. 6Banking products provided by Wintrust Financial Corp. banks. S-Corporations: • Depending on the structure of the transaction, selling shareholders have the ability to participate in the ESOP C-Corporations: • Selling shareholders may elect 1042 Rollover, in which the seller can elect to defer capital gains on the proceeds from the sale if the following thresholds are met: – The selling shareholder held the stock for more than 3 years, in which the stock was not acquired as options or for performance; – The ESOP owns at least 30% of the sponsor company post transaction; and – The proceeds from the sale are reinvested in “Qualified Replacement Property” (“QRP”) within 12 months of the sale and/or 3 months prior. QRP includes stocks and bonds of domestic operating entities. • If 1042 is elected, the selling shareholder may not participate in the ESOP. W H A T A N D W H Y ? SELLER TAX BENEFITS
  7. 7. 7Banking products provided by Wintrust Financial Corp. banks. BENEFITS OF AN ESOP In addition to its tax-advantages, an ESOP presents multiple attractive benefits to a business owner: • Ability to sell any percentage of the Company, allowing a true succession planning alternative or the ability to diversify assets • Create a market for inside or outside shareholders in closely held companies • Allow selling shareholders to maintain operational control and, if desired, the ability to ease out of the operation over time • Ability for selling shareholders to retain upside in Company after the sale with warrants or other synthetic equity • Enhance corporate performance and job satisfaction by creating an “ownership” culture • Reward employees with a benefit tied to corporate performance • Retain the legacy of the company W H A T A N D W H Y ?
  8. 8. 8Banking products provided by Wintrust Financial Corp. banks. ESOP CONCERNS W H A T A N D W H Y ? However, not all companies are ideal candidates for leveraged ESOPs, such as: • Companies that lack management depth or are unprepared to manage with leverage • Large customer concentrations • Highly leveraged (pre-transaction) • Tight working capital • Aged or small workforce
  9. 9. 9Banking products provided by Wintrust Financial Corp. banks. STRONG ESOP CANDIDATES W H A T A N D W H Y ? The following situations are good candidates for ESOP discussions: • Ownership exploring succession alternatives • Non-active ownership • Disruptive ownership • Failed sale to private equity or strategic buyer • High taxpayer (corporate or pass-thru) • Fractional sale desired • Long-term acquirer The following are characteristics for a strong ESOP candidate: • Strong management team, beyond selling shareholders, with a deep bench • Consistent or predictable annual earnings / cash flow • Diverse customer base / low concentrations • High Free Cash Flow Conversion
  10. 10. 10 F I N A N C I N G A N E S O P
  11. 11. 11Banking products provided by Wintrust Financial Corp. banks. CAPITAL PROVIDERS F I N A N C I N G A N E S O P •Commercial Lenders (Wintrust) – Asset-Based – Cash-Flow •Mezzanine Lenders •Seller Paper SENIOR DEBT JUNIOR DEBT Revolver EQUITY SecuredTermLoan 2ndLienTermLoan SeniorUnsecuredNotes Senior&Junior SubordinatedNotes/ MezzanineDebt ConvertibleDebentures PreferredStock CommonStock RISK / RETURN TO INVESTORLOW HIGH
  12. 12. 12 C O M P A N Y P R E P A R A T I O N
  13. 13. 13Banking products provided by Wintrust Financial Corp. banks. Internal Preparation: • Identify total financing needs (including excess availability) • Prepare a five year business plan forecast • Review state of accounting records and financial control systems • Be prepared to market your company as you would your products and services External Preparation: • Plan for and allow time to explore financing alternatives • Seek financial institutions with industry and transaction experience • Identify and hire advisors with transaction and market experience C O M P A N Y P R E P A R A T I O N NEXT STEPS
  14. 14. 14 C O M M O N Q U E S T I O N S
  15. 15. 15Banking products provided by Wintrust Financial Corp. banks. ESOP TRANSACTIONS • Will a business owner will get a lower exit value by selling to an ESOP than by selling in the open market? • Aren’t ESOPs only for large companies? • How much will it cost to implement an ESOP? • Will the repurchase obligation provide a heavy financial burden on the Company? C O M M O N Q U E S T I O N S
  16. 16. 16Banking products provided by Wintrust Financial Corp. banks. EMPLOYEE OWNERSHIP • Will the rank-and-file employees run the Company? • Will all of the Company’s financial information need to be shared with the employees? • Do the employees need to be consulted on day-to-day management decisions? • Will the employees have all “eggs in one basket”? • What is the role of the trustee vs. board of directors? C O M M O N Q U E S T I O N S
  17. 17. THANK YOU
  18. 18. 18 A D D E N D U M
  19. 19. 19Banking products provided by Wintrust Financial Corp. banks. MECHANICS OF AN ESOP Shareholders Stock ESOP Trust Inside Loan Company Loan Lender 2. 2. 3. 3. Comments: 1. The Company creates an ESOP Trust (“ESOT”) and the Board of Directors appoints a trustee. 2. The Company borrows funds and re-lends the proceeds (“Inside Loan”) to the ESOT. 3. The ESOT uses the funds to purchase shares from the existing shareholders. The shares are held in a suspense or “contra equity” account. 1. Note: the amortization on the note from the Lender (“Loan”) and note from the ESOP Trust (“Inside Loan”) are often different. Cash A D D E N D U M
  20. 20. 20Banking products provided by Wintrust Financial Corp. banks. A D D E N D U M WINTRUST ESOP FINANCE PATRICK J. STOLTZ Managing Director ESOP Finance Office: 847-768-9947 Cell: 847-501-0914 pstoltz@wintrust.com Pat leads the Bank’s national ESOP lending practice, providing competitive financing solutions to ESOP- owned companies. Pat has over 25 years of commercial banking experience and a proven track record of developing new business, risk management, financial analysis and development of his staff. Throughout his career, Pat has been responsible for leading a team of bankers tasked with generating Middle Market opportunities in the Chicagoland area and new ESOP opportunities across the country. Pat holds a bachelor’s degree in Accounting from Ball State University and an M.B.A. from Loyola University Chicago.
  21. 21. 21Banking products provided by Wintrust Financial Corp. banks. A D D E N D U M WINTRUST ESOP FINANCE Jim has been responsible for managing a portfolio of national, ESOP-owned and closely held, privately-owned companies. Jim also supports new business growth by developing creative and competitive financing structures, as well as for providing counsel to existing and potential clients on a range of business decisions, including succession planning and other M&A activity. Jim is a member of the Illinois and National ESOP Association and the National Center for Employee Ownership (NCEO), and holds his Bachelor of Science in Finance from University of Illinois, Urbana-Champaign. JAMES E. SWABOWSKI Senior Vice President ESOP Finance Office: 847-768-9964 Cell: 708-932-9688 jswabowski@wintrust.com
  22. 22. 22Banking products provided by Wintrust Financial Corp. banks. A D D E N D U M WINTRUST CE&A Matt Doucet Group Senior Vice President Construction, Engineering & Architectural Division Office: 847-939-9320 Cell: 312-953-6436 madoucent@wintrust.com Matt has spent the last 27 years working with Contractors in the Surety and Banking Industry. After graduating from Rensselaer Polytechnic Institute he spent 15 years in the Surety Bonding Industry working with Contractors of all specialties and sizes, covering the Midwest, West and Southeast territories of the country. Over the last 12 years Matt has been in the Banking Industry partnering exclusively with Contractors providing financing solutions to help achieve their operational goals and objectives.
  23. 23. 23Banking products provided by Wintrust Financial Corp. banks. WINTRUST FINANCIAL CORPORATION Wintrust was created to be the alternative to our big bank competitors. That means, no matter which of our banks, companies or divisions you engage with, our customers and clients come first. We offer the resources and tools of a large company, with the personal attention and customer focus you expect from a local, smaller establishment. We are a company that believes in solid customer service and we prove it with every interaction. KEY WINTRUST FACTS • Assets: $28.5 Billion • Founded: 1991 • Profitability: 21 Consecutive Years of Profitability (1996 – 2017) • Employees: 5000+ • Footprint: 15 wholly owned bank subsidiaries • Banking Offices: 150+ Locations • Nasdaq: WTFC A D D E N D U M
  24. 24. 24Banking products provided by Wintrust Financial Corp. banks. WINNER OF SIX 2017 Greenwich Excellence Awards • For more information visit: https://www.greenwich.com/commercial- banking/2017-greenwich-excellence-awards-middle-market-banking WINTRUST FINANCIAL CORPORATION A D D E N D U M
  25. 25. 25Banking products provided by Wintrust Financial Corp. banks. Our Wintrust ESOP Finance team is a national practice that focuses on financing ESOPs at any stage, including: • Newly Created ESOPs • Second Stage Transaction • Seller Debt Refinance • Repurchase Obligation Finance • Working Capital lender to seller financed transactions Target clients include manufacturers, distributors, contractors and service companies with strong management teams and consistent historical / projected cash flow. The Wintrust ESOP Finance team takes a relationship-driven approach to banking. The team is responsible for the origination and management of ESOP-owned companies for the Bank. Unlike many national ESOP lenders in the space, the Wintrust ESOP Finance team is involved not only during the transaction, but manages the relationship post- transaction to ensure the continuity of the relationship. A D D E N D U M WINTRUST ESOP FINANCE
  26. 26. 26Banking products provided by Wintrust Financial Corp. banks. THE CONSTRUCTION & ENGINEERING INDUSTRY COUNTS ON US Wintrust understands the importance the construction & engineering industry has on our local, regional and national economies which is why the Bank created a dedicated team of industry professionals. Our professionals understand how crucial it is to really know the nuances of the industry, especially through all economic cycles. Wintrust’s commitment to the industry is further reflected by it’s existing 200+ construction industry clients with over $750 million in capital devoted to the industry. WHO WE ARE Recognizing the importance Construction has in our economy, Wintrust established a devoted Construction & Engineering team in 2014 that consists of 6 members who collectively have over 60 years of experienced providing unique financial solutions for Construction, Engineering & Architecture (“CE&A”) business owners to assist them in achieving their short and long term strategic goals. Some of the primary financial solutions include: • Revolving lines of credit for working capital and general business needs • Owner occupied property and equipment/I.T. • Strategic Acquisitions • Ownership transition COMMITMENT TO ENGINEERING A D D E N D U M
  27. 27. 27Banking products provided by Wintrust Financial Corp. banks. IRS CIRCULAR 230 DISCLOSURE To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication was not intended nor written to be used, and cannot be used, for the purpose of: (i) avoiding penalties under the Internal Revenue Code; (ii) avoiding penalties under applicable state or local tax law; or (iii) promoting, marketing, or recommending to another party any transaction or matters addressed by this written advice. All parties should seek tax advice based on that party’s particular circumstances from an independent tax advisor. A D D E N D U M

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