Trucking Company
Trucking Company – Minority sale to ESOP
Goals of Company Owner:
Steve, a 54 year old owner of a trucking company, has most of his net worth tied up in his business. He wants to take out some cash, diversify his assets and remain a majority shareholder of the company.
Prior Action:
Steve does not want to sell to private equity or a strategic buyer
Solution:
- Steve sells 30% of the firm to an ESOP
- The ESOP borrows money for the 30% interest in the company. The ESOP pays Steve
- Neither Steve nor his employees have personal guarantees for the loan
- Steve defers tax on the sale of the company because he has chosen a 1042 election. As long as he holds onto his QRP, he doesn’t pay taxes.
- Steve continues to be a majority shareholder, he leads and runs the company
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For the next 3 years, the company runs mostly tax free, as the loan is paid down
- Debt is paid back twice as fast because the principle and the interest are both tax deductible (in a non-ESOP transaction, only the interest is tax deductible)
- In year 3, the debt of the company is completely paid down
- Employees gain a large retirement benefit; As beneficiaries of the ESOP trust, studies show that employees are more personally invested in the company and therefore work harder and the company becomes more profitable (insert Harvard studies)
- After year 3, Steve has many options:
- He can continue to lead the firm as a 30% ESOP
- He can do an additional tax advantaged minority sale to the ESOP up to 19% (equaling 49% total)
- He can do a tax advantaged 100% sale to the ESOP, allowing the company to run completely tax free
- Steve can buy back the 33% of the company already owned by the ESOP, giving the employees a huge windfall
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