Trucking Company
Government Contractor – Retiring owner sells minority shares to ESOP - Children maintain majority interest in company.
Goals of Company owner:
- Joseph, a 76-year-old man, operates a very large 2nd generation Government Contracting firm in California. He would like to retire. His children want to own a majority of the firm, and Joseph wants to cash out.
- Each child already owns 20% of the firm, and Joseph owns 40%
Prior Action:
- The family was looking at doing an installment sale, but the taxes were too high, and the after-tax payments from the children were too burdensome.
- They also spoke with private equity for a minority investment. However, the family would have to give up too much, and some of the 3,000 US based employees would be laid off. The family didn’t want to go this route.
Solution:
- Joseph sells his 40% stake to an ESOP
- Joseph does not have to pay tax on the sale of the company. He decides to buy floating rate notes (bonds) which allows his gain to be tax deferred indefinitely.
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The ESOP borrows money, using the Company’s balance sheet, and pays Joseph.
- Neither Joseph nor his children have to personally guarantee the loan
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For the next 4 years, the company runs completely tax free as the loan is paid down
- Debt can be paid back twice as fast because the principle is now tax deductible, and the income tax rate in California is 50%
- In year 4, the debt of the company is completely paid down
- The family has majority interest in the company
- Employees are more personally invested in the company as beneficiaries of the ESOP trust, gain a huge retirement benefit and therefore work harder (as demonstrated in these Harvard studies)
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In year 4, the children have many options:
- They can continue to run the company as is
- They can do another tax advantaged minority sale to the ESOP
- They can do a tax advantaged 100% sale to the ESOP, allowing the company to run completely tax free
- They can buy back the 40% of the company already owned by the ESOP, which would be a huge windfall to the employees.
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