Kelly O. Finnell, J.D., CLU, AIF® President, Executive Financial Services, Inc.

ESOPs and Estate Planning

Next Big Estate Planning Opportunity

2

Baby Boomer Business Owners

72% Planning for Monetization Event

62% Planning in the next 5-6 Years

Source: PricewaterhouseCoopers, Trendsetter Barometer™

Next Big Estate Planning Opportunity

3

Baby Boomer Business Owners

Source: White Horse Advisors, Survey of Closely-Held Business Owners

Monetization Planning Strategies

4

Lifetime Gift to Family Member

Sale to Third Party

Private Equity Group

Strategic Buyer

Management Buy-Out

Traditional Exit

Paths

Monetization Planning Strategies

5

Lifetime Gift to Family Member

Sale to Third Party

Private Equity Group

Strategic Buyer

Management Buy-Out

Traditional Exit

Paths

Employee Stock Ownership Plan (ESOP)

Did You Know . . .

Companies Can

Owners Can

6

Deduct Loan Principal

Deduct Dividends Paid

Operate as Tax-Exempt Entity

Control Company After Sale

Sell Company Tax-Free

Did You Know . . .

7

ESOPs Create Estate Planning Opportunities

Post-Transaction Drop-In-Value

Minority Interest Discount

Agenda

Overview

Tax Advantages

Key Issues

Estate Planning

8

ESOP Candidates

ESOP Overview

What is an ESOP?

How Does an ESOP Work?

9

What is an ESOP?

10

What is an ESOP?

11

Qualified Retirement Plan

2½ times Greater Contribution

What is an ESOP?

12

Tax Efficient Liquidity

Keep Control

Ensure Legacy

What is an ESOP?

13

Pre-Tax LBO

Tax-Exempt Corporation

14

How Does an ESOP Work?

15

Stock

Cash & Seller Note(s)

Selling Shareholder(s)

Outside Loan Company

ESOP & ESOP Trust

Inside Loan

Tax Advantages

Corporate Pre-Tax Debt Payment

16

Tax-Free Stock Sale

Tax-Exempt Corporation

ESOP Tax Benefits

17

$10M Sale of Stock

MBO Or

Redemption ESOP

ESOP Tax Savings

Proceeds to

Shareholders $7.62M(1) $10.0M $2.38M

Cost to Company $10.0M $6.6M(2) $3.4M

$5.78M

(57.8%)

(1)Assumes 23.8% federal tax on sales proceeds

(2)Assumes 34% federal corporate tax rate

ESOP Tax Benefits

18

Assuming C-Corp Asset Sale Taxed at 35%

ESOP Sale $10,000,000

Taxable Sale $15,384,615

Net to Seller $10,000,000

Capital Gains Taxed at 23.8%

ESOP Sale $10,000,000

Taxable Sale $13,123,359

Net to Seller $10,000,000

ESOP Tax Benefits

19

Tax-Affected AEBITDA Multiples

Tax Rate

0.0% 23.8% 35.0%

Mu

ltip

le

4.0 4.0 5.25 6.15

4.5 4.5 5.91 6.92

5.0 5.0 6.56 7.69

5.5 5.5 7.22 8.46

6.0 6.0 7.87 9.23

6.5 6.5 8.53 10.00

7.0 7.0 9.19 10.77

ESOP Tax Benefits

20

NO TAX ON

CORPORATE

INCOME!

100% ESOP Owned S-Corporation

ESOP Tax Benefits

21

$10M Sale of Stock

MBO Or

Redemption ESOP

ESOP Tax Savings

Tax on

Company’s

Income $792,000(1) $0M(2) $7.92M(3)

(1) Assumes corporate earnings of $2M per year and 39.6% tax rate

(2) Assumes 100% ESOP-owned S Corporation

(3) Assumes $792,000 per year for 10 years

22

23

Key Issues in ESOP Planning

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Valuation

Financing

Control

25

Valuation

26

Industry

Revenue

AEBITDA

100% Valuation

Multiple

Tax Status

Defense Contractor

$266M

$25.18M

$180M

7.15x

C-Corp

Manufacturing

$10M

$.923M

$6M

6.5x

C-Corp

3rd Party Logistics

$213M

$5.00M

$45.34M

9.61x – $4M debt

C-Corp

Financing

27

Excess Company

Cash

Seller Notes

Bank Loan

+ + Total

Transaction =

Financing

28

$2M $4M $4M $10M + + =

$6M Cash at Closing

$320,000/year (8% Interest + Warrants)

Excess Company

Cash

Seller Notes

Bank Loan

+ + Total

Transaction =

Financing

29

Sources of Cash for Repayment

Tax Savings

401(k) Match

Owner’s Adjusted Salary/Bonuses/Perqs

Corporate Earnings

30

31

Control

32

33

ESOP Estate Planning Opportunities

34

Estate, Gift, and Charitable Planning

with ESOPs

Estate and Gift Planning

35

Key Concepts

Post-Transaction Drop-in-Value

Minority Interest Discount

Post-Transaction Drop-In-Value

36

Pre-ESOP Post-ESOP

$10,000,000 Enterprise Value

$1,000,000 Excess Cash

($1,000,000) Debt

$10,000,000 Equity Value

$10.00 Price Per Share

Post-Transaction Drop-In-Value

37

Pre-ESOP Post-ESOP

$10,000,000 Enterprise Value $10,000,000

$1,000,000 Excess Cash $1,000,000

($1,000,000) Debt ($6,100,000)

$10,000,000 Equity Value $4,900,000

$10.00 Price Per Share --

Minority Interest Discount ($1,225,000)

NPV of ESOP Tax Benefits $1,354,000

Post-Transaction Price Per Share $5.03

Estate and Gift Planning

38

100% ESOP Transaction

Lifetime Gift of Warrants

Estate and Gift Planning

39

Gift of Remaining Shares

Post-Transaction Drop-in-Value

Minority Interest Discount

51% ESOP Transaction

Estate and Gift Planning

40

Gift of Remaining Shares

Post-Transaction Drop-in-Value

Minority ESOP Transaction

Charitable Planning

41

Gift of Company stock to Charity or CRT

Income Tax Deduction

Charity or CRT sells stock to ESOP

ESOP owns stock

No Recognition of Capital Gain

Owner has income stream from CRT

Use CRT as § 1042 alternative

Charitable Planning

42

Owner sells C-Corp. stock to ESOP

Elects § 1042 deferral

Owner makes gift of QRP to CRUT

Income Tax Deduction

No MID

Owner receives income for life

ESOP Candidates

43

Business Owner Characteristics

Tax Motivated

Legacy Motivated

Control Motivated

Employee Motivated

Tried Sale and . . .

ESOP Candidates

44

Company Characteristics

Tax Motivated

Equity Incentives

Strong Successor Management

Cash Flow (EBOC or AEBITDA) ≤ $1MM

Payroll (excluding Owner) ≤ $1MM

ESOP Estate Planning Opportunities

45

Questions?