BACKGROUND
- Pet food component manufacturer
- Business consists of 3 LLCs
- 2 main owners in early 50’s
- 3 locations with hundreds of employees
- Very low basis
- Large relative AAA attributable to main owners
GOAL
- Main owners want to retain control
- Owners want partial liquidity to invest in other opportunities
- Reward long-term employees
- Access business value with lowest tax impact as possible
SOLUTION
- Payout legacy AAA with 5 year note
- Form C Corporation holding company, roll 2 of the 3 LLCs into new HC
- Sell 98% of HC stock to new HC ESOP (each owner retains 1%)
- Borrow total of $26,700,000 from bank
- $22,700,000 Senior Debt at floating rate
- $4,000,000 Revolver at floating rate
- Seller finance $35,000,000 as subordinated 20 yr. note payable at 4.5% (effective mezz. rate of 15%)
- Warrants issued for NPV of difference in rates (actual vs owed) exercisable when debt is extinguished
- Warrants will recapture value equal to approx. 40% of company value
- Convert to S Corp immediately after sale of HC stock to ESOP
BENEFIT TO CLIENT
- Combined, owners receive $50,000,000 cash from sale to ESOP
- Immediate cash from ESOP – $15,000,000
- Notes totaling $35,000,000 plus interest over 20 years
- Combined, owners receive AAA payouts totaling $9,500,000 over 5 years
- Sellers receive additional $20,000,000 in cash when warrants are exercised
- Estimated owners’ combined capital gains tax savings $10,000,000
- Estimated corporate tax savings $39,000,000 over next 10 years
- Employees share $50,000,000 plus growth of corporate value at no cost to them
- Owners retain control and diversify assets