The ESOP Concept Is Your Trucking Company a

The ESOP Concept: Is Your Trucking Company a Good Candidate? April 24, 2017 Mark A. Flinchum, CPA The information presented herein is general in nature and should not be acted upon without the advice of a professional. © 2017 KSM Business Services, Inc.

Agenda ▪ ▪ ▪ The ESOP Opportunity The ESOP Structure and Operation ESOP Advantages and Disadvantages ESOP Profile and Third Party Buyout Comparisons Next Steps for Interested Companies Questions 2 ksmcpa. com

The ESOP Opportunity 3 ksmcpa. com

What is an ESOP? ▪ Tax-qualified retirement plan ▪ Operates similar to a profit sharing or 401(k) plan ▪ Investment primarily in employer stock ▪ Used as a corporate finance and business succession tool 4 ksmcpa. com

Why an ESOP? ▪ ESOP purchases the business with tax deductible dollars ▪ In properly structured sale, the seller of C corporation shares pays no capital gain on the sale ▪ Employees are incentivized to grow the company ▪ 100% ESOP-owned company can operate generally tax-free 5 ksmcpa. com

Alternative to Sale to Strategic Buyer ▪ Control over timing of sale ▪ Greater job security for current employees ▪ Maintain independence of company ▪ Flexibility to quickly react to opportunities and challenges in the marketplace 6 ksmcpa. com

The ESOP Structure and Operation 7 ksmcpa. com

Typical Leveraged ESOP Structure cash 1 outside loan 6 cash inside loan 5 2 stock 4 cash 3 8 ksmcpa. com

Post-Transaction Cash Flows 1 retirement contribution loan re-payment 2 3 4 shares released loan re-payment 9 ksmcpa. com

Ownership ▪ ESOP Trust is stockholder of record ▪ Beneficial ownership on behalf of plan beneficiaries (the employees) ▪ Trustee of the ESOP must be named ▫ External Trustee (bank) or Internal Trustee ▫ Takes on fiduciary responsibility ▪ ESOP does not have to own 100% of Company’s stock 10 ksmcpa. com

Plan ▪ Complexity of drafting ESOP plan requires experienced ERISA legal counsel ▪ Terms that most impact ESOP participants: ▫ Plan eligibility (ex. one year from start of employment) ▫ Vesting of contributions (three yr. Cliff / five yr. Step) ▫ Payment of balance upon retirement (ex. within first year, except in cases of large balances) 11 ksmcpa. com

ESOP Advantages and Disadvantages 12 ksmcpa. com

ESOP Advantages - Seller ▪ To the Seller ▫ ▫ Seller may retain a portion of equity Known Buyer/Exit Strategy Diversify Seller’s Net Worth Section 1042 Rollover - Benefit available to seller of C-Corporation stock - Defer Capital Gains on Stock Sale - Eliminate Capital Gains (step-up basis, if assets held at death) 13 ksmcpa. com

ESOP Advantages - Company ▪ To the ESOP Company ▫ Use pre-tax cash flow to repay indebtedness (ESOP contribution is tax deductible, use contribution to repay loan) ▫ ▫ ▫ Enables faster repayment of debt with improved cash flow Can be used as a financing device Avoid using after-tax dollars to redeem owner’s shares Retention of motivated employees Continuity of management Higher Sales, Job Retention - ESOPs increase sales, employment, and sales/employee by about 2. 3% to 2. 4% per year over what would have been expected absent an ESOP (Rutgers/2000) 14 ksmcpa. com

S-Corporation ESOP Tax Advantage ▪ Compelling S-Corp ESOP Advantage ▫ Earnings inside your 401(k)/retirement plans are not taxed until you take distribution ▫ ESOP is an ERISA plan just like 401(k) ▫ Therefore, S-Corp ESOP’s earnings are not taxable in the current period. They are only taxed when participants take distribution upon death, disability, retirement, etc. 15 ksmcpa. com

ESOP Advantages - Employees ▪ To Employees ▫ Employees participate in the appreciation of the company’s value ▫ Avoid sale to a third party which could affect jobs ▫ Avoid potential loss of jobs during economic downturns - 3% of employees with employee stock ownership were laid off during Great Recession compared to a 12% rate for employees without employee stock ownership (National Science Foundation & GSS/2012) ▫ Increased job satisfaction ▫ Exit strategy (put right) ▫ More Retirement Assets - ESOP participants have approximately 2. 2 times as much in their accounts as participants in comparable non-ESOP companies with Defined Contribution plans (EOF/2010) 16 ksmcpa. com

ESOP Disadvantages ▪ ESOP can only pay Fair Market Value ▫ Strategic premium might be gained by sale to industry participant or ‘roll-up’ buyer ▪ Owners may not get 100% ‘cash out’ ▫ Even with high leverage, a 100% sale will require taking back a “seller note” for a portion of the sale price ▪ Complexity of ESOP and regulation 17 ksmcpa. com

C-Corporation Planning ▪ C-Corporations selling stock to ESOP are eligible for Section 1042 capital gain deferral ▪ To qualify for Section 1042, ESOP must: 1. Own at least 30% of company after the sale 2. Seller must have held the stock for at least three years 3. Seller must purchase securities defined as “Qualified Replacement Property” (QRP) 18 ksmcpa. com

C-Corporation Planning (continued) ▪ If a selling shareholder elects Section 1042 treatment, the shareholder (and family members) may not participate in the ESOP Plan for the latter of 10 years, or the payoff of the acquisition debt (“Inside Loan”) ▪ Capital gains tax of 20% still historically low. Consider evaluate paying tax and not deferring under Section 1042 depending on facts and plans ▪ If forming or increasing ESOP ownership to 100% may want to consider accelerated plan funding to create tax NOLs tax deductions 19 ksmcpa. com

ESOP Profile and Third Party Buyout Comparisons 20 ksmcpa. com

ESOP Candidate Profile q q q q q Owner approaching retirement Capable management team to succeed owner Unused debt capacity Profits to support ESOP debt service Company size (more cost effective benefit) Motivated by tax advantages Motivated by “ownership culture” advantages Desire to buy-out a minority shareholder Limited third party / strategic buyers in market 21 ksmcpa. com

ESOP vs. Third Party Buyout ESOP Third Party Buyout Company controls timing Buyer controls timing Price base upon independent valuation Strategic buyers may pay “synergistic” premium Payment depends upon company’s borrowing capacity Buyer’s more likely to arrange own financing Seller financing can be used to improve purchase price Purchase price more likely to consist of stock, or include earn out features ESOP structure more likely to preserve jobs More likely to result in layoffs and downsizing ESOP structure is an incentive to all employees to increase profitability Generally fewer incentives to rank and file employees 22 ksmcpa. com

ESOP vs. Third Party Buyout ESOP Third Party Buyout Smaller companies tend to be more nimble in a highly competitive environment As part of a larger organization, there is less flexibility to quickly react to changing conditions Depends upon company’s borrowing capacity Greater ability to infuse capital for expansion and acquisitions More flexibility to sell part of the company and for sellers to retain growth potential Aside from earn out provisions, buyers tend to purchase substantially all of the company Executive potential for participation is restricted only by their ability to grow the company Executives tend to be restricted by company policies and practices regarding incentives ESOP purchases company stock including existing liabilities Generally purchase assets leaving shareholders with existing liabilities 23 ksmcpa. com

Next Steps for Interested Companies 24 ksmcpa. com

From Ideas to Actions ▪ Will an ESOP help us achieve the varying objectives? ▪ ▪ 25 Board Shareholders Management Employees ksmcpa. com

ESOP Feasibility Analysis ▪ A Feasibility Study will allow corporate decision makers to determine if, and to what extent, an ESOP can assist the board, management and shareholders in achieving desired objectives - Smiley, et. al. , “Employee Stock Ownership Plans” 26 ksmcpa. com

ESOP Feasibility Analysis ▪ What is included: ▫ ▫ Valuation Analysis Deal Structure discussion & analysis Financing options & alternatives Potential for § 1042 Rollover Circumstances may lead to creating two or more Scenarios * 30% Transaction vs. 100% Transaction * Bank Financing vs. Seller Financing 27 ksmcpa. com

Stage 1: Planning & Analysis Information Gathering Establish Objectives Feasibility Analysis on alternatives that might meet established objectives ESOP Third Party Sale Family Succession Review Findings and Conclusions Decision 28 ksmcpa. com

ESOP Deal Team Sell Side (Shareholder(s)) • Valuation Advisor • Shareholder Counsel • Same as Company Counsel? • CPA/Tax Advisor Buy Side (Trustee) • Valuation Advisor • Trustee Counsel • Plan Administration (TPA) Company • Management • Company Counsel • Bank 29 ksmcpa. com

Stage 2: ESOP Formation Build ESOP Deal Team Complete Corporate Restructuring (if needed) Raise Capital for Transaction (Bank / Private Equity / Employees) Financing Draft ESOP Plan Valuation Opinion Transaction Doc’s Trustee Deal Review, Approval Close Transaction 30 ksmcpa. com

Questions? Mark Flinchum P 317. 580. 2018 E mflinchum@ksmcpa. com 31 ksmcpa. com