#325: How ESOPs Work: Myth Busting, 1042 Tax Deferrals, Warrants, Executive Comp Plans and More with Keith Apton and Miguel Paredes
Ep.#11 [THEME FIVE]
As we continue down this ESOP mini-series, we want to do some serious myth-busting by diving even deeper into the technical details on how ESOPs work.
This two-part episode is all about deal structures, 1042 tax deferrals (similar to 1031 exchanges), seller’s potential to capture future equity growth via the form of warrants (similar to rolled equity), how to handle key executive compensation plans, and the shareholder benefits of transforming a company into an ESOP.
In this episode, you will learn how an ESOP offers great tax benefits and how you can prepare to maximize your tax deductions before switching to an ESOP. Also in this episode, you will learn about the interview process from a trustee’s standpoint and about warrant options to ensure that the best interest of the employees are at the forefront of the deal without screwing over the primary seller.
In part one of this episode, Keith Apton, the managing director of UBS’s ESOP Capital Group, talks about some false narratives with ESOPs, such as, “If I sell to an ESOP, I won’t get as much cash for my business.” He then talks about the 1042 tax code and discusses how converting the business from an S Corp to a C Corp could defer the gains at the time of the transaction and potentially indefinitely through estate planning. Keith tees up the topic of warrants and how they act as a form of rolled equity that can be as lucrative as the rolled equity in a private equity sale–except in an ESOP sale, the owner still has control over the direction of the company. Keith finishes this segment of the episode by sharing a story of what he thinks would change if S Corps had the same tax benefits as C Corps.
In part two of this episode, Miguel Paredes, president of Prudent Fiduciary Services, is a trustee and shares stories about how a trustee keeps the employees’ best interests in mind without screwing over the seller, and even more so, being a partner that can help everyone get what they want out of the business during the transaction, and most importantly, in the future.
Miguel goes deep into the mechanics of how warrants and SARs (stock appreciation rights) plans can be used to reward key executives with additional future equity based on the value they help create. He explains how exponential growth can happen when warrants for the seller are combined with SAR plans of the key executives and aligned with all the employees' incentives to grow the equity value of the company for their ESOP account.
// WATCH THE INTERVIEW ON YOUTUBE: Intentional Growth™ Podcast
What You Will Learn
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