Tom Azzarelli Part Time CFO Chandler AZ B2B CFO

Jul 11
15

Exit Planning Strategies with ESOP’s

You may be thinking of selling your business in the traditional way but have you considered an ESOP (Employee Stock Ownership Plan) as an alternative vehicle to exit your closely held business? If not, this article may get you thinking.

ESOP’s have been around since the early 80’s but not well known as a selling strategy for business owners of a closely held business until recently. The very name ESOP suggests confusion not only with the business Community but also with many Accountants as well. Some demystification is required.

An ESOP (Employee Stock Ownership Plan) is a defined contribution employee benefit plan that allows employees to become owners of stock in the company they work for. It is equity based deferred compensation plan. Under the ESOP plan, companies provide their employees the opportunity to acquire the company’s shares at a reduced price over a period of time. Employee ownership can mean many things, ranging from a few executives owning stock in their companies to the ownership of a company by most or all of its employees.

So what does an ESOP have to do with selling your business? Let’s examine the benefits of selling your business through an ESOP compared to an outright sale to a third party. If you sell your business to a third party you will receive cash, stock or perhaps notes as payment for the purchase price. Without proper tax and estate planning strategy the taxes paid on the gain from this type of transaction may take up to 50% of your proceeds. Of course, there are some sophisticated tax concepts that can be utilized to shelter some of this tax but for the most part the tax bit will be big. When you do an ESOP, seller shareholders are given special tax favored treatment under IRS Section 1042 election that allows deferral of the gain if certain Tax Laws, Department of Labor and ERISA rules and guidelines are followed. How does this work? There are several steps in the process but let’s assume you have arrived at a valuation for your business and you are ready to sell it to your employees. By the way, you do not have to sell all of your shares or lose control either. In fact, you can still work in the company every day if that’s a preference of yours.

To make it a simple example, let’s say the sales price is $5,000,000 for 30% of the stock. (I used 30% because this is the minimum percent to qualify for special tax favored treatment mentioned above)

The ESOP Trust, an entity formed to hold the shares for the employees the seller shareholder sells will pay you $5,000,000 for 30% of the company’s stock. There are several ways for the ESOP to raise the funds to pay you but we will not get into this in this article. I’ll save these details for further articles. Let’s assume they have the funds. Now comes the important part! You must invest (within 18 months) the $5,000,000 you receive in Qualified Replacement Property (QRP) (stocks etc.) and make an election under the IRS Code Section 1042 in order to get the qualified tax favored deferral of the gain. The gain is postponed indefinitely until the sale of the QRP and if you hold it in your estate it’s never taxed. The transfer to your heirs will be on a stepped-up basis. Not a bad deal! Also there are significant tax deductions and savings at the company level with an ESOP transaction that generates positive cash flow.

But you are wondering how do I get any money if it’s all invested and I can’t sell shares without being taxed? You can borrow against these funds and pull out a significant amount of the $5,000,000. The end result of the transaction? You diversified your wealth into a liquid portfolio and you have no tax bill unless you sell the QRP.

An ESOP is a great Estate Planning mechanism and one that is worthy of a hard look when you are thinking about your EXIT Strategy.

In further articles I will elaborate more on the process involved in preparing for an ESOP and how they work and the benefits to shareholders and ESOP companies.

Posted in Exit Planning by Tom Azzarelli. No Comments

Sep 10
1

B2B CFO NAMED IN PRESTIGIOUS INC. 5000 LIST

B2B CFO NAMED IN PRESTIGIOUS INC. 5000 LIST

184% Growth Earns B2B CFO Spot in the 2010 List of Fastest
Growing Companies in America

Phoenix, Ariz. August 24, 2010 – B2B CFO, nation’s largest
provider of CFO services to small businesses, has been named to the
prestigious Inc. 5000 list of fastest growing companies in America.

Now in its 29th year, Inc. Magazine’s annual ranking judges US-based
and privately held companies by their revenue growth. This year’s
list was ranked on the percentage in revenue increase from
2006-2009. B2B CFO’s growth earned 84th place in its industry.

“There are approximately 27 million small businesses in the U.S.
today,” said Jerry L. Mills, founder and chief executive officer of
B2B CFO, “It is a huge honor to be among the fastest growing and the
most successful businesses in the country. Our firm has experienced
tremendous growth over the past few years and we are on track to
continue expanding. I am especially grateful to all of the firm’s
dedicated Partners who continue to advocate our services around the
nation.”

In a personalized letter congratulating B2B CFO on this
accomplishment, Jane Berenston, editor-in-chief of Inc. Magazine’s
wrote “Congratulations: your company, B2B CFO, has made the 2010
list of the fastest growing private companies in America. This
achievement puts you in rarefied company, especially if you consider
that over 27 million businesses are registered in the USA. The elite
group you’ve now joined has, over the years, included companies such
as Microsoft, Timberland, Visa, Intuit, Jamba Juice, Oracle, and
Zappos.com. I look forward to congratulating you in person in
Washington, D.C.”

B2B CFO’s growth is reflected in numerous awards this year. The
company was also recently named in ACE Corporate Growth Awards,
which recognized the most successful and fastest growing companies
in Arizona.
In August 2010, B2B CFO has grown to 170 Partners across 39 states,
representing 5,000 years of cumulative experience. Each Partner is a
seasoned financial executive who serves as CFO to growing businesses
on as-needed basis. Approximately 80% of the Partners have a
background that includes senior executive positions at the Big Four,
and all of the Partners have held high level executive finance
positions in various industries in corporate America. Together, B2B
CFO Partners work with more than 500 businesses in the nation with
combined annual sales of more than $3 Billion.

Jerry L. Mills and many of the B2B CFO Partners regularly dedicate
time to educate business owners on financial matters. Mills is a
frequent speaker and contributor and has been featured on many
national media networks including FOX Business, Fortune Small
Business, Smart Money and many others. Mills is also the author of
The Danger Zone – Lost in the Growth Transition, and Avoiding The
Danger Zone – Business Illusions, both business non-fiction books
that help entrepreneurs understand and build a strong financial
strategy.

“We look forward to participating in the Inc. 500|5000 conference in
Washington, DC this fall,” added Mills. “Along with my colleagues, I
look forward to the October 2nd awards ceremony and to meeting the
entrepreneurs that created the other 5000 fastest growing companies
in America.”

About Inc. Magazine

Founded in 1979 and acquired in 2005 by Mansueto Ventures LLC, Inc.
is the only major business magazine dedicated exclusively to owners
and managers of growing private companies that delivers real
solutions for todays innovative company builders. Inc. provides
hands-on tools and market-tested strategies for managing people,
finances, sales, marketing, and technology.

Inc. Magazine’s 29th annual Inc. 5000 ranking of the fastest-growing
private companies in the country is available online at
www.inc.com/inc5000/list

About B2B CFO

Headquartered in Phoenix, Ariz., the firm was founded in 1987 by
Jerry L. Mills. B2B CFO is the nation’s largest CFO firm serving
entrepreneurial, growth and mid-market companies with revenue under
$75 million. The firm’s partners have an average of 25 years of
experience and each individual partner is a senior level executive
with a broad range of expertise. Please visit online at
http://www.b2bcfo.com/