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Transportation / Shipping Related Manufacturer Recapitalization

February 10, 2012

When one of our clients was diagnosed with a serious illness, he asked our firm to help structure a transaction that would allow him to accomplish several goals with respect to ownership transition. Among his key objectives were to maintain majority ownership of the business, which served the ocean shipping and transportation segment, within the family, minimize any negative tax consequences related to ownership transition and provide management with an opportunity to buy into the business.

After analyzing the objectives, we worked with the owner to develop a strategy based upon a leveraged recapitalization as the overall driver of the transaction. We went to market and raised financing that allowed the business to dividend out several turns of EBITDA to the family. We were able to optimize the company’s capital structure, lower its cost of capital and position it for future success. Additionally, working with the owner’s estate planning professionals, we structured a gifting program that allowed him to gift stock to his three sons on a regular basis, taking advantage of the ability to gift tax-free annually up to the IRS limits.

We assisted the owner in meeting his third objective, allowing management to buy into the business, through the use of a very creative structure. As the members of the management team didn’t have the resources to write a big check upfront for their individual equity stakes, we structured a plan where the company loaned each of them the funds necessary for their purchases in the form of a five year forgivable note. Each year, the company forgave 20% of the original note balance. As this was attributable as compensation and taxable to each of the executives, overall compensation was grossed up annually to provide funds for the executives to pay taxes related to the note forgiveness. By addressing each of the owner’s objectives, we provided a solution that ensured the ongoing success of the business through continuity of family ownership and a further aligning of management’s interests with those of the owners.

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