BACKGROUND
- Work includes highway and bridge construction, overlay projects, water/ sewer construction, and sewage treatment plant construction
- C Corporation
- 4 shareholders
- Approximately 21 non-union employees
- Company value $20,000,000
GOAL
- Shareholders looking for an exit strategy over time
- Corporate tax relief
- Employee retention & motivation
- Maximize retirement benefits
SOLUTION
- ESOP 1042 election to defer capital gains tax was not desirable
- Due to company specific circumstances, IRC 1202 tax treatment offered combined capital gains tax rate of 8.625%
- Establish an ESOP Trust
- All shareholders will sell 100% of their stock to the ESOP
- Sellers will receive cash and notes in exchange for selling their stock
- Warrants will be issued to selling shareholders
- Immediate S Corporation election
BENEFIT TO CLIENT
- Owners received $600,000 cash at closing
- 12 year seller notes totaling $19.4 million at a 4.5% interest rate (life of loan interest = approx. $6.4 million)
- To reward/incentivize sellers for taking subordinated notes, shareholders received 800,000 warrants
- At the end of the seller note period the projected value of warrants is estimated to be $7.9 million
- As a 100% S Corp ESOP owned company, 100% of future profit will not be taxed from that point forward
- Over the next 12 years the corporate tax savings are estimated to be over $29 million
- Tax savings cover the entire cost of the stock sale and continue indefinitely