1. ALL ABOUT ESOPS
Patrick J. Stoltz
Managing Director
ESOP Finance
pstoltz@wintrust.com | 847-768-9947
James E. Swabowski
Senior Vice President
ESOP Finance
jswabowski@wintrust.com | 847-768-9964
Matt Doucet
Group Senior Vice President
Construction, Engineering & Architectural Division
madoucet@Wintrust.com | 847-939-9320
2. 2Banking products provided by Wintrust Financial Corp. banks.
CONTENTS
I. What and Why?
II. Financing an ESOP
III. Company Preparation
IV. Common Questions
V. Addendum
I. Mechanics of an ESOP
II. Speaker Information
III. Introduction to Wintrust
IV. IRS Circular 230 Disclosure
A L L A B O U T E S O P S
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WHAT IS AN ESOP?
An Employee Stock Ownership Plan (“ESOP”) is a qualified, defined contribution
retirement plan that invests primarily in employer stock.
Used for:
• Succession Planning
• Employee Rewards
• Building Entrepreneurial Culture
Tax Benefits for:
• Selling Shareholder
• Company
W H A T A N D W H Y ?
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S-Corporations:
• As with all S-Corporations, ownership is responsible for tax obligations (rather than
being a company obligation); however, an ESOP is a tax-exempt employee benefit
plan.
– A 100% S-Corp. ESOP is exempt from federal and, in most cases, state taxes.
C-Corporations:
• Reduce taxable income with contributions to the ESOP
– Often, these contributions are a non-cash expense
• Reduce taxable income with tax-deductible dividends
W H A T A N D W H Y ?
COMPANY TAX BENEFITS
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S-Corporations:
• Depending on the structure of the transaction, selling shareholders have the
ability to participate in the ESOP
C-Corporations:
• Selling shareholders may elect 1042 Rollover, in which the seller can elect to defer
capital gains on the proceeds from the sale if the following thresholds are met:
– The selling shareholder held the stock for more than 3 years, in which the
stock was not acquired as options or for performance;
– The ESOP owns at least 30% of the sponsor company post transaction; and
– The proceeds from the sale are reinvested in “Qualified Replacement
Property” (“QRP”) within 12 months of the sale and/or 3 months prior. QRP
includes stocks and bonds of domestic operating entities.
• If 1042 is elected, the selling shareholder may not participate in the ESOP.
W H A T A N D W H Y ?
SELLER TAX BENEFITS
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BENEFITS OF AN ESOP
In addition to its tax-advantages, an ESOP presents multiple attractive benefits to a
business owner:
• Ability to sell any percentage of the Company, allowing a true succession
planning alternative or the ability to diversify assets
• Create a market for inside or outside shareholders in closely held companies
• Allow selling shareholders to maintain operational control and, if desired, the
ability to ease out of the operation over time
• Ability for selling shareholders to retain upside in Company after the sale with
warrants or other synthetic equity
• Enhance corporate performance and job satisfaction by creating an
“ownership” culture
• Reward employees with a benefit tied to corporate performance
• Retain the legacy of the company
W H A T A N D W H Y ?
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ESOP CONCERNS
W H A T A N D W H Y ?
However, not all companies are ideal candidates for leveraged ESOPs, such as:
• Companies that lack management depth or are unprepared to manage with
leverage
• Large customer concentrations
• Highly leveraged (pre-transaction)
• Tight working capital
• Aged or small workforce
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STRONG ESOP CANDIDATES
W H A T A N D W H Y ?
The following situations are good candidates for ESOP discussions:
• Ownership exploring succession alternatives
• Non-active ownership
• Disruptive ownership
• Failed sale to private equity or strategic buyer
• High taxpayer (corporate or pass-thru)
• Fractional sale desired
• Long-term acquirer
The following are characteristics for a strong ESOP candidate:
• Strong management team, beyond selling shareholders, with a deep bench
• Consistent or predictable annual earnings / cash flow
• Diverse customer base / low concentrations
• High Free Cash Flow Conversion
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CAPITAL PROVIDERS
F I N A N C I N G A N E S O P
•Commercial Lenders (Wintrust)
– Asset-Based
– Cash-Flow
•Mezzanine Lenders
•Seller Paper
SENIOR DEBT JUNIOR DEBT
Revolver
EQUITY
SecuredTermLoan
2ndLienTermLoan
SeniorUnsecuredNotes
Senior&Junior
SubordinatedNotes/
MezzanineDebt
ConvertibleDebentures
PreferredStock
CommonStock
RISK / RETURN TO INVESTORLOW HIGH
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Internal Preparation:
• Identify total financing needs (including excess availability)
• Prepare a five year business plan forecast
• Review state of accounting records and financial control systems
• Be prepared to market your company as you would your products and services
External Preparation:
• Plan for and allow time to explore financing alternatives
• Seek financial institutions with industry and transaction experience
• Identify and hire advisors with transaction and market experience
C O M P A N Y P R E P A R A T I O N
NEXT STEPS
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ESOP TRANSACTIONS
• Will a business owner will get a lower exit value by selling to an ESOP than by
selling in the open market?
• Aren’t ESOPs only for large companies?
• How much will it cost to implement an ESOP?
• Will the repurchase obligation provide a heavy financial burden on the Company?
C O M M O N Q U E S T I O N S
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EMPLOYEE OWNERSHIP
• Will the rank-and-file employees run the Company?
• Will all of the Company’s financial information need to be shared with the
employees?
• Do the employees need to be consulted on day-to-day management decisions?
• Will the employees have all “eggs in one basket”?
• What is the role of the trustee vs. board of directors?
C O M M O N Q U E S T I O N S
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MECHANICS OF AN ESOP
Shareholders
Stock
ESOP
Trust
Inside Loan
Company
Loan
Lender
2.
2.
3.
3.
Comments:
1. The Company creates an ESOP Trust (“ESOT”) and the Board of Directors appoints a trustee.
2. The Company borrows funds and re-lends the proceeds (“Inside Loan”) to the ESOT.
3. The ESOT uses the funds to purchase shares from the existing shareholders. The shares are held in
a suspense or “contra equity” account.
1.
Note: the amortization on the note from the Lender (“Loan”) and note from the ESOP Trust (“Inside
Loan”) are often different.
Cash
A D D E N D U M
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A D D E N D U M
WINTRUST ESOP FINANCE
PATRICK J. STOLTZ
Managing Director
ESOP Finance
Office: 847-768-9947
Cell: 847-501-0914
pstoltz@wintrust.com
Pat leads the Bank’s national ESOP lending practice,
providing competitive financing solutions to ESOP-
owned companies. Pat has over 25 years of
commercial banking experience and a proven track
record of developing new business, risk
management, financial analysis and development of
his staff. Throughout his career, Pat has been
responsible for leading a team of bankers tasked
with generating Middle Market opportunities in the
Chicagoland area and new ESOP opportunities
across the country.
Pat holds a bachelor’s degree in Accounting from
Ball State University and an M.B.A. from Loyola
University Chicago.
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A D D E N D U M
WINTRUST ESOP FINANCE
Jim has been responsible for managing a portfolio of
national, ESOP-owned and closely held, privately-owned
companies. Jim also supports new business growth by
developing creative and competitive financing
structures, as well as for providing counsel to existing
and potential clients on a range of business decisions,
including succession planning and other M&A activity.
Jim is a member of the Illinois and National ESOP
Association and the National Center for Employee
Ownership (NCEO), and holds his Bachelor of Science in
Finance from University of Illinois, Urbana-Champaign.
JAMES E. SWABOWSKI
Senior Vice President
ESOP Finance
Office: 847-768-9964
Cell: 708-932-9688
jswabowski@wintrust.com
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A D D E N D U M
WINTRUST CE&A
Matt Doucet
Group Senior Vice President
Construction, Engineering &
Architectural Division
Office: 847-939-9320
Cell: 312-953-6436
madoucent@wintrust.com
Matt has spent the last 27 years working with Contractors
in the Surety and Banking Industry. After graduating from
Rensselaer Polytechnic Institute he spent 15 years in the
Surety Bonding Industry working with Contractors of all
specialties and sizes, covering the Midwest, West and
Southeast territories of the country. Over the last 12 years
Matt has been in the Banking Industry partnering
exclusively with Contractors providing financing solutions to
help achieve their operational goals and objectives.
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WINTRUST FINANCIAL
CORPORATION
Wintrust was created to be the alternative to our big bank
competitors. That means, no matter which of our banks,
companies or divisions you engage with, our customers
and clients come first. We offer the resources and tools of
a large company, with the personal attention and customer
focus you expect from a local, smaller establishment. We
are a company that believes in solid customer service and
we prove it with every interaction.
KEY WINTRUST FACTS
• Assets: $28.5 Billion
• Founded: 1991
• Profitability: 21 Consecutive Years of Profitability
(1996 – 2017)
• Employees: 5000+
• Footprint: 15 wholly owned bank subsidiaries
• Banking Offices: 150+ Locations
• Nasdaq: WTFC
A D D E N D U M
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WINNER OF SIX 2017
Greenwich Excellence Awards
• For more information visit: https://www.greenwich.com/commercial-
banking/2017-greenwich-excellence-awards-middle-market-banking
WINTRUST FINANCIAL
CORPORATION
A D D E N D U M
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Our Wintrust ESOP Finance team is a national practice that focuses on financing ESOPs
at any stage, including:
• Newly Created ESOPs
• Second Stage Transaction
• Seller Debt Refinance
• Repurchase Obligation Finance
• Working Capital lender to seller financed transactions
Target clients include manufacturers, distributors, contractors and service companies
with strong management teams and consistent historical / projected cash flow.
The Wintrust ESOP Finance team takes a relationship-driven approach to banking. The
team is responsible for the origination and management of ESOP-owned companies for
the Bank. Unlike many national ESOP lenders in the space, the Wintrust ESOP Finance
team is involved not only during the transaction, but manages the relationship post-
transaction to ensure the continuity of the relationship.
A D D E N D U M
WINTRUST ESOP FINANCE
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THE CONSTRUCTION & ENGINEERING INDUSTRY COUNTS ON US
Wintrust understands the importance the construction & engineering industry has on our local, regional and national
economies which is why the Bank created a dedicated team of industry professionals. Our professionals understand
how crucial it is to really know the nuances of the industry, especially through all economic cycles. Wintrust’s
commitment to the industry is further reflected by it’s existing 200+ construction industry clients with over $750
million in capital devoted to the industry.
WHO WE ARE
Recognizing the importance Construction has in our economy, Wintrust established a devoted Construction &
Engineering team in 2014 that consists of 6 members who collectively have over 60 years of experienced providing
unique financial solutions for Construction, Engineering & Architecture (“CE&A”) business owners to assist them in
achieving their short and long term strategic goals. Some of the primary financial solutions include:
• Revolving lines of credit for working capital and general business needs
• Owner occupied property and equipment/I.T.
• Strategic Acquisitions
• Ownership transition
COMMITMENT TO ENGINEERING
A D D E N D U M
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IRS CIRCULAR 230 DISCLOSURE
To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication was not intended nor written to
be used, and cannot be used, for the purpose of: (i) avoiding penalties under the Internal Revenue Code; (ii) avoiding penalties under applicable state or local
tax law; or (iii) promoting, marketing, or recommending to another party any transaction or matters addressed by this written advice. All parties should seek tax
advice based on that party’s particular circumstances from an independent tax advisor.
A D D E N D U M