The 4th Annual Great Lakes Regional ESOP Conference is hosted each year by the ESOP Association. This year it took place at the Kalahari Resort & Convention Center in Sandusky, Ohio from October 17, 2018 to October 19, 2018. Nick Sypniewski, Managing Director of ComStock’s Cincinnati Office, spoke in two breakout sessions regarding valuation drivers to motivate employees and examining case studies on how to fix common ESOP problems. In addition to Nick’s presentations, there were three breakout sessions that I attended that stood out: the economic update, the legal & regulatory update, and assessing the feasibility of an ESOP.
Economic Update
The conference was kicked off with an economic update from Jeffrey Korzenik, Chief Investment Strategist at Fifth Third Bank. A major concern about the economy in the United States is the unemployment rate, which has not been at 3.7% since December of 1969. The cause for concern is that there is a shortage in the labor markets that will eventually cause economic growth to halt. In addition, approximately 1.4 million millennials are sidelined from the job market due to opioid use, which significantly contributes to the labor shortage.
Legal & Regulatory Update
In the legal & regulatory update, certain changes were made to retirement plans including hardship distributions, student loan repayment 401(k) matches, and defaulted loan rollovers.
Under the Bipartisan Budget Act of 2018, 401(k) hardship distributions now include qualified non-elective employer contributions, qualified matching contributions, and earnings; whereas previously only the contributions made by participants were eligible.
The Tax Cut and Jobs Act created an extension to the 60-day rollover rule. As of January 1, 2018, participants now have until their personal tax filing deadlines with extensions to rollover funds without paying taxes.
Finally, a new trend is 401(k) matching contributions made by employers if student loans are paid down by a participant. For example, if a participant makes a loan repayment of 2%, then the employer will make a 2% contribution to the participant’s 401(k). Participants are still eligible to make 401(k) contributions and receive matches on actual 401(k) contributions. This has created some issues among employees as it could be considered a discriminatory rights features issue.
Assessing the Feasibility of an ESOP
An ESOP feasibility study is a study that helps determine whether an ESOP is feasible for a business. The primary elements of most ESOP feasibility studies include a valuation, financing and cash flow analysis, and the basic transaction structure. Many business owners that were considering an ESOP attended this session which gave them the next steps in proceeding with an ESOP transaction.
In the valuation analysis, owners obtain a reasonable estimate of value for their company and the after-tax cash amount they can expect to receive. In addition, a valuation professional will help the owners understand the key drivers of value.
The lengthiest part of the ESOP feasibility study is the financing and cash flow analysis. Before determining how the transaction will be financed, a valuation professional can help determine what terms the company can afford without financially strapping and impairing operations. Then the company will typically borrow a certain amount of money from a bank to finance the transaction, and the remaining amount will need to be financed with seller notes. Many times, warrants will be attached to the seller notes in place of a higher interest rate.
Finally, the owners need to determine how much they are willing to sell to the ESOP. In addition, the determination of the management structure after the transaction is critical to the success of the company. Another consideration is how the ESOP contributions will fit into the overall payroll and benefit structure.
For more information regarding ESOP feasibility studies, please contact:
| Nick Sypniewski | Joseph Ludwig |
| (513) 813-4101 nsypniewski@comstockadvisors.com | (513) 348-1869 jludwig@comstockadvisors.com |