Historical Perspective

Transcription

1 ESOP Cash Management, Secret Innovations in Repurchase Obligations 1 Repurchase Obligation impacts on cash flow and the attributable valuation discount Scott Miller, Enterprise Services, Inc. 2 Historical Perspective Prior to 1998: ESOPs C Corp Most ESOPs minority position IRC Sect Rollover popular Few if any 100% ESOPs Repurchase obligation immaterial Employee owned company not the end destination 3 1

2 ESOP Renaissance in 1998 ESOPs in S Corporations EGTRRA (2001) breakout period Discover that 100% S ESOP is free of income tax obligations Estimated 80 90% ESOPs are S Most ESOP S Corps are 100% (or migrating toward 100%) 4 Many ESOPs control position Repurchase obligation (RO) issues RO now material for most ESOPs ESOPs should have RO study Absent RO study, FMV could be impacted by lack of planning Many ESOPs have excess liquidity Volatile economy (since 2008) Ignoring RO could negatively impact BV 5 Funding repurchase obligations through traditional investments 6 2

3 Historical ESOP RO Liability Solution 1. Use cash flow to handle liability 2. Use leverage to handle liability 3. Rare instances money would be put away, sinking fund, to handleliability liability 4. Rarely was an Investment policy Statement created or used 7 Common ESOP Repurchase Liability Solutions 1. Use of a Repurchase Liability study is common 2. Creation and use of an Investment Policy Statement is common 3. We commonly see a mixture of different strategies to address the repurchase Liability issue i.e. a) Life Insurance b) CD s and different Fixed Income Investments c) Equities (i.e.. ETF s, Structured Products or Ind. Equities) 4. The Repurchase issue is part of regular meetings 8 now. (i.e.. Quarterly Board meetings) Recently approved application for managing and monitoring cash flows for repurchase obligations 9 3

4 New Investment Application for ESOPs Preserve purchasing power (inflation) Align other investment account to mirror economic performance of public companies Prudent behavior to match investments with repurchase obligations Market based investment with FDIC principle protection 10 Suggested Key Features of Market Linked Deposits (MLD) FDIC Principle Protection Link returns to a market index o S&P 500, Dow, etc Simple return calculation l o Point to point return X Participation % Fee Transparency Pre approved liquidity options 11 FDIC Issued Favorable Ruling Sep 13, 2013 FDIC Ruling Summary: Each ESOP Plan Participant s FDIC Insurance Coverage passes through to the ESOP Trust. Calculation Example: Largest owner % = 10% $250,000 / 10% = $2,500,000 of available FDIC Coverage per FDIC 12 Institution 4

5 ) 10 Year S&P % Participation Example 1 $175 $100,000 invested at 85% Participation (12/31/03 to 12/31/13) $166K $156K 56% Gain $150 S&P 500 (w/o div) $100k Investment (Thousands) $125 $100 $75 Projected Investment Maturity Value FDIC Insurance (floor) $50 13 S&P500 (without dividends) performance data from Bloomberg. Market Linked Deposit data is hypothetical performance data. Please see Disclosures at the end of this presentation. 10 Year S&P % Participation Example 2 $100,000 invested at 85% Participation (2/28/1999 to 2/28/2009) $125 $100 $100K 0% Loss FDIC Insurance (floor) $100k Investment (Thousands s) $75 $50 $25 $59K Not Applicable S&P 500 (w/o div) Projected Investment Maturity Value $ 14 S&P500 (without dividends) performance data from Bloomberg. Market Linked Deposit data is hypothetical performance data. Please see Disclosures at the end of this presentation. Archford FDIC Coverage Calculator Provisional Patent Go to for more information 15 5

6 Disclosures Archford Capital Strategies ("Archford") is a registered investment advisor. Information contained in this report is for informational purposes only and should not be considered investment advice or recommendations. Advice may only be provided after entering into an advisory agreement with Archford. This document is for informational purposes only. The information and data presented herein has been prepared on the basis of the publicly available information, internally developed data or other third party sources. No guarantee is given as to the accuracy, completeness, or reasonableness of the contents contained ti dherein. Investing involves risk, including the possible loss of all principal and returns thereon. The investment will fluctuate so that an investor s shares, when redeemed, may be worth more or less than their original cost. There is no guarantee that investment objectives will be met. This material contains hypothetical performance data. Hypothetical performance results have many inherent limitations. No representation is being made that any account will achieve profits or losses similar to those shown. In fact, there are frequently material differences between hypothetical performance results and the actual results subsequently achieved by any particular portfolio strategy. 16 Speaker Information 17 James D. Maher CEPA, CRPC, CRPS Archford Capital Strategies Chief Executive Office and Founder In addition to focusing on wealth management, estate planning, concentrated stock strategies and investment management at Archford Capital Strategies, Jim focuses on the needs of closely held business owners. He has worked to create a network of professionals to assist business owners with a range of solutions to business continuation from ESOPs to buyouts and sales. A Certified Exit Plan Advisor (CEPA), he works with outsourced as well as the group s own attorneys, CPA's, business valuation specialists and marketing/employee education companies establishing resources for business owners in transition. The team has evolved dto be industry leading Financial i Consultants. Jim is an award winning, nationally recognized authority in estate planning, business transition and philanthropy for closely held businesses, and a sought after trainer and presenter on a range of topics. He holds a BS and JD from the University of Missouri Columbia. He is a member of the Missouri Bar, The Exit Planning Institute, The National Center for Employee Ownership and the St. Louis Estate Planning Council. Jim holds the designations of Chartered Retirement Planning CounselorSM (CRPC ), Certified Exit Plan Advisor (CEPA) and Chartered Retirement Planning Specialist (CRPS). Contact Information: Phone: (618) or (855) (toll free) j.maher@archfordcapital.com Website:

7 Scott Miller CPA/ABV, CVA Enterprise Services, Inc. President As an entrepreneur himself, Scott understands closely held and family owned businesses. He balances that perspective with years of corporate experience, starting his career at a national public accounting firm, going on to serve as a VP of Finance and plan fiduciary for a large ESOP company. He then served as a principal in several family businesses, and founded ESI in At ESI, he s helped hundreds of businesses through transition planning, including valuations, strategic t planning, financing, i fairness fi opinions, i terminations ti and litigation support. As a nationally recognized authority on business valuations, he s published widely in professional journals and is a sought after speaker for professional and industry groups. He s authored technical seminars for the American Institute of Certified Public Accountants and the National Association of Certified Valuation Analysts. Scott has an undergraduate degree from Kenyon College and an MBA from the Cornell University Johnson Graduate School of Management. He is a CPA with additional business valuation accreditation from the AICPA and NACVA. Contact Information: Phone: (262) esi@esi enterprise.com Website: enterprise.com 19 7