Staged Sale of Advertising / Media Company to ESOP
March 8, 2011
One of our clients began the succession planning process several years ago when he was starting to think about selling his C-Corporation advertising and media business to the employees through the use of an ESOP. He wasn’t ready to step back from the day-to-day management of the business, but wanted to begin diversifying his wealth. We proposed an initial 45% sale of the business to the ESOP as the first step. This approach allowed him to begin the transition process and also take advantage of the capital gains tax deferral available under Section 1042 of the Internal Revenue Code. In order to defer capital gains taxes, an owner needs to sell at least 30% of a C-Corporation to the ESOP and reinvest the proceeds in securities of a domestic operating business. By selling 45%, he met the minimum requirement and was able to take advantage of the deferral, increasing his net proceeds.
After a four-year period, he decided to take the next step and sell the remaining 55% to the employees. In this case, the company had maintained its C-Corp status and he was therefore able to defer the capital gains tax on the remaining 55% of the business sold to the ESOP. Additionally, upon the sale of the remaining 55%, the company converted to S-Corporation status. This was a key step in managing the company’s cash flow going forward as the ESOP trust, the 100% owner of the business at this point, is a tax-exempt entity. The company now pays no Federal income tax as a result. This increases the cash flow available to service debt and fund operations.
Throughout both stages of the overall transition, we coordinated all of the activities leading to closing. We assembled the professional team, prepared and distributed the information required by potential financing sources and coordinate the due diligence process leading to an optimized financing structure. We also incorporated a Management Incentive Plan to reward management for its efforts in profitably growing the business. At the end of the day, we provided a staged process that allowed our client to accomplish his goals of a gradual exit from the business while diversifying his holdings. As the company had grown over the four years since stage one closed, the purchase price for the remaining 55% increased as well. The increase in value combined with the capital gains tax deferral provided to our client led to a significant increase in net proceeds, management gained tremendous upside and the employees were rewarded for their hard work.