Sign up for our weekly C-Suite Snacks webinars here: https://www.citrincooperman.com/infocus/c-suite-snacks Our C-Suite Snacks webinar series provides the middle market with brief, strategic, and tactical business improvement information for 30 minutes every week. Join Citrin Cooperman live every Thursday at noon for snack-sized insights for business executives. The recently proposed tax provisions in the Biden Administration’s American Families Plan should provide substantial incentives for business owners to discuss the creation of an Employee Stock Ownership Plan (ESOP). During this C-Suite Snacks webinar session, Howard Klein and Heather Oboda covered more about ESOPs, including: - An overview of what an ESOP is including financial and non-financial benefits - The common misconceptions about ESOPs - How the current tax proposals make an ESOP more attractive

1. NOT SOLD ON SELLING
YOUR BUSINESS?
June 3, 2021 | C-Suite Snacks Webinar Series
Why Now is a Good Time
to Consider an ESOP

2. Welcome &
Introduction
Howard Klein
Partner, Trust and Estate
Services Practice Leader
hklein@citrincooperman.com
914-949-2990
Heather Oboda
Partner
hoboda@citrincooperman.com
914-949-2990

3. • Transfer the company to a family member
• Sell the business to one or more key employees
• Sell the business to one or more coworkers
• Sell to key employees using an Employee Stock Ownership
Plan (ESOP)
• Sell the business to an outside third party
• Engage in an Initial Public Offering (IPO)
• Retain ownership but become a passive owner
• Liquidate
Options

4. US Market
• Approximately 7,000 ESOPs
• 10.7 M active participants
• Assets of $1.4T
• Somewhat industry agnostic
• Metrics to look for potential candidates:
• Strong EBITDA (minimum of $2.5M+)
• Large employee base

5. What is an Employee Stock Ownership Plan
(ESOP)?
• An ESOP is a qualified, defined contribution employee benefit plan that invests primarily in the stock of the
employer. Practically, however, it is a tax-advantaged way to sell all of a portion of your business.
• Business owner sells stock (for cash or a combination of cash and a promissory note) to an employee
stock ownership trust
• Price negotiated between selling shareholders and an ESOP trustee.
• Cannot pay more than “Fair Value Market”
• Independent valuation firm advises trustee – not the selling owners
• Valuation methods:
• Discounted cash flow “DCF” (typical method)
• Public market comps
• M&A transactions in industry

6. Key Benefits
1. Liquidity and diversification
• Creates known eligible buyer
• Frees up owner’s capital for other investments
• Allows for a gradual sale of the company
2. True valuation
• Owner is paid FMV for the business
• Value determined by independent appraiser
3. Tax incentives
• Company deductions for contributions to ESOP
• If ESOP is a C Corp and there is preferred stock
the company gets a tax deduction for the preferred
dividend
• If ESOP owns 100% all profits are tax-free
• Owner may avoid/defer capital gains (1042
Rollover)
4. Control
• Majority ownership or board retains operational
control
• Owner can maintain upside while preserving legacy
5. Impact on employees
• Promotes ownership culture
• Incentivizes employees to stay longer to vest in the
ESOP
• Increases company’s ability to attract and retain
talent

7. Common Misconceptions
• My company is not the right type of company
• I have to sell all of my company stock
• An ESOP is too expensive to set up and maintain
• My employees don’t have the resources to buy the company
stock
• The company will have to make a fixed contribution each year
• My employees will have access to financial information
• I will lose control of my company
• My employees will have voting rights
• I can’t go back
• An ESOP can’t buy my shares because it doesn’t have any
assets

8. Taxes

9. Taxes to the Corporation
• Loan interest, principal payment, and dividends are
deductible
• Payroll contributions up to 25% with some limitations
• If company contributes more than it can deduct, there
is a 10% excise tax on excess contributions
• If corporation is an S corp and 100% owned by ESOP
• ESOP is a tax-exempt pension trust that pays no
current tax on its share of S corporation income
• This creates significant extra cash flow for the
company to repay stock acquisition debt and to have
capital to grow and thrive

10. • Shareholder could pay capital gains tax on sale
• Shareholder could elect to do a 1042 exchange and defer
tax
Sale of Shares
Section 1042
• Allows C Corp owner to defer or eliminate capital gains on
sale of company
• Shares need to be held for at least 3 years
• Sell at least 30% to and ESOP
• Seller, family members, and 25% shareholders cannot
participate in ESOP

11. Section 1042 Cont.
• Reinvest proceeds into Qualified Replacement Property (QRP)
• Common, preferred stock bonds, convertible bonds, or a floating rate note of an operating company
incorporated in US
• At least 50% of assets must be used in active trade or business
• No more than 25% of gross receipts from passive sources
• Must be done within 3 months before or 12 months after sale
• Taxes will not be owed until the taxpayer has disposed of QRP
• What is not a disposition?
• Gift of QRP
• Transfer upon death of QRP holder
• Transfer of QRP in connection with divorce

12. Questions?

13. Thank You
F o r Wa t c h i n g & L i s t e n i n g
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HEALTHCARE PROVIDER ORGANIZATIONS FACING A POST-COVID WORLD
June 10, 2021 | 12:00 PM ET/9:00 AM PT
Featuring: Kate Broderick, Manager & Sarah Hughes, Manager