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MBO Ventures Completes First Cannabis ESOP, Neutralizing 280E Impact

Cannabis companies can use this to circumnavigate 280E.

MBO Ventures has completed the first-ever cannabis employee stock ownership plan (ESOP). The development marks a significant stride in providing a transformative solution for plant-touching cannabis businesses grappling with the challenges posed by Section 280E.

Section 280E of the Internal Revenue Code prohibits cannabis businesses from deducting ordinary business expenses on their income tax statements. MBO, through its patent-pending ESOP methodology, has successfully neutralized the impact of 280E for three cannabis firms, including multi-state operator Theory Wellness.

The achievement was spearheaded by Darren Gleeman, managing partner of MBO Ventures. Gleeman says, “By neutralizing the impact of 280E, we empower plant-touching operators to thrive and contribute to the industry’s growth.”

Through the ESOP structure, MBO Ventures provides a viable solution for cannabis businesses to navigate the challenges posed by 280E, enabling them to optimize financial performance and pave the way for sustainable growth while financially empowering their employees.

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Construction Firms: Depreciation Recapture solved

Construction Firms: ESOP solves Depreciation Recapture problem

What is Depreciation

Certain large purchases, like a rig excavator or a backhoe, might not be deductible in the year the item is purchased.  Instead, the IRS makes you spread the cost of the equipment over a certain amount of years.  (In 2020, we can now expense it in our first year.)  Example:  You might have purchased a full rig excavator for $300,000 in 2012.  At that time, your accountant explained to you that you could depreciate it over 6 years, or $50,000 per year.   This asset, in 2020, is now fully depreciated. 

What is Depreciation Recapture

When this rig excavator is sold, the seller owes tax on the difference between the depreciated value and the sale price.   This is known as depreciation recapture, and it’s the point where the deferred taxes are supposed to be paid.  To follow the above example, the rig excavator is now depreciated to $0.  If you sold it today for $100,000, you would need to pay income tax on the full $100,000 ($100,000 minus $0).    This is known as depreciation recapture.  With depreciation recapture, you are paying ordinary income tax rates, NOT long term capital gains rates. 

When you sell your firm, your taxes might be larger than you expected

When you try to sell your construction firm, all buyers will need to structure this as an asset sale (we’ll get into this in another blog).   If you’ve depreciated all of your equipment over the years, you will have a larger than expected tax bill.  The IRS will make you recapture all of the tax savings on all of your equipment that you have depreciated over the years.  You will have to pay ordinary income tax rates on this depreciation recapture, NOT long term capital gains.

ESOP to the rescue

Do you ever wonder why there are so many construction firms that have become ESOPs?  There are plenty of reasons. One small reason (depends on how much depreciation you took over the years ) is the removal of depreciation recapture. 

In a traditional asset sale, the owner of a construction firm is hit with a huge tax bill. Not so with an ESOP. When you sell to an ESOP, it is structured as what is called a stock sale – this will remove the depreciation recapture.

Another important fact: If the owner sells to his employees via an ESOP structure, the owner doesn’t have to pay any tax at all.  Reat that again please. How? The government allows a special capital gains deferment to owners that sell to an ESOP.  And the owner can defer this payment indefinitely.  Literally, when you die, the capital gains ‘deferment’ becomes permanent. 

To learn more, go to www.mboventures.com or contact me, directly Darren Gleeman to learn more: dgleeman@mboventures.com

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An ESOP is a great method to transfer your Family-owned BusinessTo your family and your employees

It was the end of a cold Friday in the deep recesses of COVID-19.  I had one last zoom conversation with a seasoned Wealth Manager from a large midwestern firm.  He was super bright, had vast tax knowledge and he was eager to understand. One of his clients with grown children, wanted to figure out a tax efficient way to get them the business.

Gifting it to them was way too expensive. Selling the business to the kids would create a huge annual liability for the company, and the father would have to take a huge tax bite for years to come. 

Selling to private equity or a competitor would mean, for all intents and purposes, that the kids would be out of the company in a couple of years;  many employees would be fired, and the culture would be ripped to shreds. This didn’t work either.

An ESOP is meant to be used for family transition.  You can use an ESOP structure, along with Trusts to ensure the future of your kids. This article will take you about 3 minutes to read, but it will give you a base of understanding.

What is an ESOP

An ESOP is a way to sell your company to your employees. It is simply a corporate finance tool created in the 1970s. Congress designed ESOPs to incentivize owners to sell to their employees by giving the owners and the companies a package of substantial tax incentives.

Benefits of an ESOP at a glance

Similar to Private Equity, the company takes out a loan to pay the owner (no personal guarantee)  

1.      The owner pockets the proceeds and does not have to pay capital gains tax on it (deferred indefinitely).

2.      The company will pay no taxes going forward (IRS and State Tax Free),

3.      The company pays down the debt rapidly,

4.      The people that get the equity will be your employees, not a 3rd party.

5.      Your children will get warrants to buy back a large chunk of the company in the future.

a.      Trusts are used with the ESOP structure to minimize tax for your children, but I will get into that in another article

6.      Employees keep their jobs; become employee/owners; work hard and produce more.

The government subsidizes the ESOP Loan

The government subsidizes the loan to pay off the owners.  It’s all about the right deduction in the right place.  The IRS allows the company to deduct the principal of the loan. Typically, a company can deduct only the interest paid on the loan.  For ESOPs, the government allows the company to deduct the principal.  So…. Instead of paying taxes to the IRS, the government will enable you to use this money to pay down this loan.

Owner pockets money from sale, tax free

The owner will earn more money by selling to the ESOP. When the owner receives her money from the sale of the company, she doesn’t have to pay taxes.   She can defer the taxes indefinitely by putting the money into another asset like stocks or bonds.

With an ESOP, your cash flow doubles overnight.

An ESOP pays no taxes on the earnings.  This means the company has twice as much money to pay down debt, use it for CAPEX and acquisitions.

Your Family can get warrants

to buy back a portion of the company in the future

Your children and your current management will manage the firm into the future. You can structure it so they can get warrants to buy as much as 40% equity into the future. The Corporate culture that you created will stay the same.  Nobody gets fired unnecessarily.

You can easily sell 30% or 50% or 75% or 100% of your firm. You choose. An ESOP has tremendous flexibility.

 

If this idea is of interest to you, make sure to contact Darren Gleeman at dgleeman@mboventures.com, and we can have a conversation.  Our team has structured over 300 ESOPs – we know what we are doing.

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“I want to sell my company. Will I make more money by selling to an ESOP or to Private Equity?”

If you purely look at the numbers, you will make much more money by selling to an ESOP!

“What if the Private Equity firm pays 50% more money than the ESOP?”

After taxes, the owner gets more money by selling to an ESOP.

“How is it possible to earn more  money from selling to an ESOP?”

Congress has bestowed significant and tremendous tax incentives and subsidies to ESOPs and the selling owners. Even with a 50% premium, the owner will STILL make more money by selling to an ESOP. Here’s why:

  1. The money received by the owner when selling to the ESOP initially is tax deferred and can be tax free if structured correctly.
  2. The owner can receive warrants to buy back a percentage of the firm in the future. This means the future gets a significant “bite at the apple” years down the road.
  3. Once sold to an ESOP, the company will run tax free. Zero Federal tax. Zero State tax.

If this idea is of interest to you, make sure to contact Darren Gleeman at dgleeman@mboventures.com, and we can have a conversation.  Our team has structured over 300 ESOPs – we know what we are doing.

Economyadmin_dwco

Do you remember the Seinfeld episode where Jerry stole the chocolate babka?

Do you remember the Seinfeld episode where Jerry stole the chocolate babka?  Or did he steal the marble rye? (I don’t remember, but I digress.)

The bakery is a real place – was a real place. It’s name was the Royal Pastry Shop and if you went near the place in the 90’s, the line snaked around the block. Sometimes. (trick was to get there very early)

So what happened? Why did they go out of business?

Bottom line is that they thought the business would run forever – they were a Seinfeld icon, their babka was unparalleled. It was a money machine.

History doesn’t always repeat itself, but one takeaway is that you need to take some chips off the table when you can. One of the best ways to do this is through an ESOP.

If you can sell a small portion of your firm, like 30%, and pay zero taxes on that sale, it is something that you should at least consider. At least learn your options.

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Imagine you are the CEO of a large midwestern manufacturing firm. Now imagine you pay zero tax!

Imagine you are the #CEO of a very large #manufacturing firm situated in the middle of the USA. You have hundreds of employees, and the company earns about $30 Million per year. Now, imagine that you were chosen by Congress to be a tax free entity. No Federal tax. No state tax.  Pretty good fantasy, right? Save $15 Million in year one alone.

Now – here is the question I want you to think about – Do you think… believe  – with all of this free cash – that you can triple earnings within 10 years? And grow this to be a $1 Billion company?   

How would you go about doing it – now that you have double the cash flow – every year?

Make some targeted acquisitions? Definitely.

Increase capital expenditures? Absolutely.

Here’s the coolest part of this fairytale

It’s not a fantasy. It’s completely real. Let me explain.

When you sell your company to your employees via an #ESOP, Congress decided that the company doesn’t have to pay tax anymore. No Federal tax, and no state tax.

One other thing that you might find interesting – when an owner sells the firm to their employees, the owner pockets the proceeds from the sale gets that money capital gains tax free.

 

There are many more benefits too. Stay tuned.

 

If this idea is of interest to you, make sure to contact #DarrenGleeman at dgleeman@mboventures.com, and we can have a conversation. Our team has structured over 300 ESOPs – we know what we are doing.

Economyadmin_dwco

It is not easy selling an Engineering/ Architecture firm.

The key assets of the firm, your employees, walk out the door every night. The associates dream of one day making partner. The junior partners dream of paying off their debt. Retiring partners look forward to cashing out, but they are not psyched about installment payments and capital gains taxes.

Firms do not have cash lying around to pay off the retiring partners. This means that the retiring partners are paid out over numerous years. Sometimes the firms will have to borrow money to pay off the partners.

Associates becoming partners need to buy into the partnership. Most often, these new partners need to take out a loan to buy into the partnership.

It’s very tax inefficient.

Setting up an ESOP fixes this problem

An ESOP is a way to sell the company to the current partners, while the retiring partners can cash out, and defer their capital gains taxes. Congress designed ESOPs to incentivize partners to sell to their employees by giving the partners and the companies a package of substantial tax incentives.

Benefits of an ESOP at a glance

 

Similar to Private Equity, the company takes out a loan to pay the partners (no personal guarantee)  

1.      The partners pocket the proceeds and do not have to pay capital gains tax on it (deferred indefinitely).

2.      The company will pay no taxes going forward (IRS and State Tax Free).

3.      The company pays down the debt rapidly.

4.      The people that get the equity will be your employees, not a 3rd party.

5.      Management will get warrants to buy back a large chunk of the company in the future.

6.      Associates and new partners see a great future of becoming owners without taking out huge loans.

 

The government subsidizes the ESOP Loan

The government subsidizes the loan to pay off the partners. The IRS allows the company to deduct the principal of the loan. Typically, a company can deduct only the interest paid on the loan.  For ESOPs, the government allows the company to deduct the principal.  So…. Instead of paying taxes to the IRS, the government enables the company to use this money to pay down this loan.

Partners pocket money from sale, tax free

The partners will earn more money by selling to the ESOP. When the partners receive their money from the sale of the company, they don’t have to pay taxes.   They can defer the taxes indefinitely by putting the money into another asset like stocks or bonds.

 

With an ESOP, the firms cash flow doubles overnight.

An ESOP pays no taxes on the earnings.  This means the company has twice as much money to pay down debt, use it for CAPEX and acquisitions.

If this idea is of interest to you, make sure to contact Darren Gleeman at dgleeman@mboventures.com, and we can have a conversation.  Our team has structured over 300 ESOPs – we know what we are doing.

Businessadmin_dwco

4 Reasons why you should consider an ESOP over Private Equity!

A business owner has three options to sell their company:

  1. Sell the firm to employees via an ESOP
  2. Sell the firm to Private Equity or
  3. Sell the firm to a competitor.  

This article will briefly explain why an ESOP could be a better option than selling to private equity!

ESOP vs Private Equity

1.     An owner, after tax, can earn more money selling to an ESOP than to Private Equity. This is why: An owner can sell their firm to an ESOP for fair market value. The ESOP cannot pay more money than fair market value. If a private equity firm pays the same amount of money, the ESOP has more value to the owner. Here’s why: the capital gains tax for the owner, when selling to an ESOP, can be deferred indefinitely.  If an owner sells to Private Equity, the owners are required to pay significant taxes. On average, you are talking about 30%. In order to be equal, the private equity firm would have to pay 30% more than fair market value.

2.     Only ESOPs receive government subsidies on loans. Both ESOPs and Private Equity use loans to purchase the company. Instead of paying taxes, Congress allows ESOPs to use this money to pay down the debt, while Private Equity receives zero subsidies from Congress.

3.     Companies structured as 100% ESOPs run completely tax free. Therefore, the corporate cash flow is double that of a private equity backed firm.

4.     Employees of ESOPS have incredible financial benefits. Besides maintaining their jobs, they earn more money than their private equity counterparts as part of the sale.  According to a Harvard University study, when private equity purchases a firm, statistically 4% – 13% of employees are fired as a result of management changes.

To learn more, go to www.mboventures.com or contact me, directly Darren Gleeman to learn more: dgleeman@mboventures.com

Economyadmin_dwco

Pros / Cons of ESOPs

An ESOP allows employees, without any out-of-pocket investment, to buy out wholly or in part, the owners of the company for which they work.  The owners receive massive tax benefits, and the company, if owned 100% by the ESOP is completely tax-free.

Some History

  • In 1974, Congress creates the Employee Stock Ownership Plan (ESOP)
    • ESOPs are allowed to borrow money, and use the company’s balance sheet to do it.       
  • In 1986, Congress allows 100% tax deferral on the gain
  • In 1997, Congress allows S Corporations to become ESOP, ushering in a completely tax free company

Pros

  1. Creates a known buyer for business owner’s stock, freeing owner’s capital
  2. Selling owners pay no immediate (or perhaps zero) capital gains taxes if they elect to do a 1042 deferral. This occurs if they reinvest their gains in “qualified replacement property.” 
  3. Owner is paid fair market value for business determined by a Trustee who hires an independent valuation firm
  4. Company receives special tax deductions
  5. The ESOP is a tax-free entity. All income flowing to the ESOP is tax exempt.  
  6. Owners can maintain full control of the company, regardless of what percentage is sold to the ESOP.
  7. Under an ESOP, funds used to buy the company are fully tax deductible, financing accomplished with pre-tax dollars.
  8. Employee, through a trust set up for them, receive equity in the Company, as opposed to 3rd party
  9. Shareholders can sell wholly or in part, and different shareholders can sell different amounts of shares.

Cons

  1. Regulatory Oversight by DOL and IRS
  2. ESOP cannot pay more than fair market value
  3. Requires ongoing administrative costs, including annual valuation, legal and trustee fees
  4. Lenders only finance a portion of the purchase price, seller notes cover balance
  5. Complex Deal process

 To learn more, go to www.mboventures.com or contact me, directly Darren Gleeman to learn more: dgleeman@mboventures.com

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How to sell your WBE to an ESOP and Maintain your Certification

If you own a female-owned-and-operated business, most likely you have applied for and received a WBE – Woman-owned Business Enterprise – certification. (If you haven’t done this, stop reading now and Google this.)

Why do women owned firms covet this certificate?  With it, they have significantly more opportunities.  WBE’s are eligible for numerous business contracts that competitors without the certification cannot receive.  There are government contracts specifically earmarked for WBE certified businesses.

So… what happens when the female founder wants to sell or partially exit the WBE?

While WBE status is great for business, it can be risky when it is time to sell your company.  This is why: If the company that buys you is not also WBE certified, you will lose your status and potentially many of your contracts that were specifically earmarked for a WBE enterprise.

However, You Can Sell Your Company To An ESOP Without Losing Your WBE Status(and get paid Fair Market Value)

Number one – you can easily sell up to 49% of your business to your employees via an ESOP.  You don’t have to re-certify, or do anything special.  This is a great method if you want to take some chips off the table, and continue to owning a majority of your company.

Number two – a woman owned business can now be sold 100% to their employees without losing their coveted WBE certification.

An ESOP will be certified as a WBE as long as the following conditions are met:

1.      A woman holds the highest position in the company,

2.      The board is controlled by women,

3.      The day to day operations of the company are controlled by women,

4.      51 percent of the beneficial owners in the ESOP are women and

5.      The ESOP trustee is a woman or a financial institution.

An ESOP is an alternative way to sell your company, where your employees take ownership.

Here’s how it works:

1.      Similar to Private Equity, the company takes out a loan to pay the owner.  

2.      The owner pockets the proceeds and does not have to pay capital gains tax on it (deferred indefinitely).

3.      The company will pay no taxes going forward.

4.      The company pays down the debt rapidly.

5.      The people that get the equity are your employees, not a third party.

6.      You, as the owner, can continue to manage, or your management team will take over – your choice.

To learn more, go to www.mboventures.com or contact me, directly Darren Gleeman to learn more: dgleeman@mboventures.com

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