The Esop Solution: Prepared For

THE ESOP SOLUTION
Prepared for:
5/16/05
I. About Blue Ridge
About Blue Ridge ESOP Associates
Over 15 Years of Experience
Established in 1988
ESOP Administration Experts

ESOP Administration is Our Primary Business
One of the Top Five Firms in the US in Number of Clients
Served
Professional Staff with a Focus on Outstanding Client Service

Directors and Managing Directors with 15 to 25 years of
experience
Administration Staff with Professional Designations
Dedication to Providing Outstanding Client Service
2
About Blue Ridge
We Serve Over 200 Clients Throughout the US
• ESOP and ESOP/401(k) Combination
Plans, both C-Corp and S-Corp Companies
• Clients Ranging in Size from 15 Employees

to Over 23,000 Employees
• Office Locations in Virginia, North

Carolina, Minnesota and California
• Client Retention Rate of Over 98%
• Diverse Spectrum of Industries Served
3
II. Why ESOP?
Ways to Transfer Ownership for Private Companies
¾ Family members assume business
¾ Outside buyer (individuals or

firm)
¾ Management “buyout” (LBO)
¾ Employee “buyout” (ESOP)
5
Which approach can do all of the following?
¾ Maintain ongoing company

¾ Provide a competitive advantage
¾ Allow for tax-advantaged sale of all or
part of the business
The Answer… an ESOP!
6
What is an ESOP?
A defined contribution retirement plan

that is qualified under federal tax law
(Sec. 401(a)) and is primarily invested in
company stock.
7
Benefits of an ESOP
¾ Company remains intact
¾ Significant tax advantages
¾ Added benefit to employees
¾ Benefit linked to company

performance
8
How Does the ESOP Impact Employees?
¾ Additional retirement money
¾ Stake in company’s future financial

performance
¾ Creates need to understand “big

picture” so they can impact it
positively
9
WHY ESOP?
9 Because it’s fair

9 To incentivize performance, productivity and growth
9 As part of strategic planning
9 In response to market demands
10
III. ESOP Tax Incentives
ESOP Tax Incentives
¾ Corporate contributions to an ESOP
are tax-deductible.
• Contributions to the ESOP to repay both principal and interest on
loans (not just interest).
• Dividends paid to participants or used to pay ESOP debt (except for
S Corps.).
¾ Contributions to an employee’s ESOP account are tax
deferred until distribution.
¾ Selling C Corp. shareholder(s) may defer capital gains
taxes on sales of stock to an ESOP (“Section 1042
Rollover”).
12
Section 1042 Rollover
Seller(s) may defer capital gains taxes of the sale of
stock to an ESOP when certain conditions are met.
Available only to private C corporations
Seller(s) must have owned stock for 3
years
ESOP must own 30% of company after
sale and the ESOP cannot dispose of
stock and drop below 30% for three
years
Seller(s) must reinvest funds within 12
months of the sale date in “qualified
replacement property”
13
Tax Incentives continued…
An ESOP’s portion of the income earned by an
S Corp. is not taxable.
¾ Since there are no federal taxes on an ESOP’s share
of S Corp. income, a 100% S Corp. ESOP does not
need to make distributions to shareholders to pay
these taxes.
¾Downside of S Corp. status – Currently
no Section 1042 rollover permitted.
However, can do deal as a C Corp., then
switch to an S Corp. (no status change for
5 years).
14
IV. ESOP Mechanics
Leveraged Transaction
Company Loan
Company Bank
Company
ESOP
Loan Payments
Loan
Cash Payments
Contributions
ESOP
Loan
Cash
Selling
Shareholders Common Stock Employees
ESOP Trust Stock
Allocations
QRP Distributions
16
Employee Accounts
Employees accounts credited each

year with company contributions
Typically allocated as a
percentage of salary
Stock forfeitures reallocated to employee
accounts
Account growth based on earnings of ESOP
trust (stock growth)
Accounts typically subject to vesting
17
Role of the Trustee
¾ Oversees administration of the assets in the
trust
¾ May be a bank, trust company or corporate
officer
¾ May be independent or directed
¾ Selling shareholder may not serve as
Trustee for the stock purchase
transaction(s)
¾ Votes the shares owned by the ESOP
• Pass-through voting required on issues
involving merger, liquidation or sale of
the company
¾ Ensures the transactions are fair and the
plan is managed solely on behalf of ESOP
participants
18
Repurchase Liability
ESOP required by law to repurchase shares from departing
employees
Employee has “put option” to require company to repurchase shares
Repurchased at Fair Market Value (FMV)
Payments may be deferred and paid in installments of up to 5 years
Liquidity needs may be accelerated by diversification option
Company should plan for liquidity by contributing cash to plan
over time, establishing a sinking fund, or investing in insurance
Software and repurchase liability experts can help with forecasting
19
Distributions
Small account balances typically paid in lump sum
within 1 year of termination
Other payments typically start 5 years after
termination or 1 year after retirement/ disability
Participant may delay distribution until age 65
Paid in cash lump sum or over additional 5 years
(based on cash flow of company)
Distributions taxed as ordinary income unless rolled
over into an IRA
10% penalty on cash distributions before
59 1/2
In leveraged transactions, distributions typically
delayed until the loan is paid off
20
How To Create An ESOP
¾ Conduct a Feasibility study
¾ Hire Independent Appraiser to determine FMV

for the company’s stock
¾ Consult with an Attorney on ESOP plan

design/fiduciary issues and preparation of trust,
plan, and related documents
¾ Hire ESOP Administration firm
¾ Assign a Trustee
¾ Proceed with sale

21
EmployeeOwnership
Employee ownership is not just employees earning stock as
compensation.
S
ER EM
LD PL
O O
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RE YE
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A
SH
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S
A
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A
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W
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O
S
It’s a different way to organize a company!
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Contact Information
Thomas Roback, Jr., CEP

Director of Business Development
[email protected]
Tel. (410) 747-4840
418 East Jefferson Street

Charlottesville, VA 22902
Telephone: (434) 979-5500
Fax: (434) 979-7667
www.BlueRidgeESOP.com
23
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THE ESOP SOLUTION

ESOP Administration Experts

Professional Staff with a Focus on Outstanding Client Service

• Clients Ranging in Size from 15 Employees

• Office Locations in Virginia, North

• Client Retention Rate of Over 98%

• Diverse Spectrum of Industries Served

¾ Family members assume business

¾ Outside buyer (individuals or

¾ Employee “buyout” (ESOP)

¾ Maintain ongoing company

The Answer… an ESOP!

A defined contribution retirement plan

¾ Significant tax advantages

¾ Added benefit to employees

¾ Benefit linked to company

¾ Additional retirement money

¾ Stake in company’s future financial

¾ Creates need to understand “big

9 Because it’s fair

Employees accounts credited each

¾ Hire Independent Appraiser to determine FMV

¾ Consult with an Attorney on ESOP plan

¾ Hire ESOP Administration firm

¾ Proceed with sale

It’s a different way to organize a company!

Thomas Roback, Jr., CEP

418 East Jefferson Street

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