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InHouse Recap

An InHouse Recap is ideal for owners who do not want to sell their business but would like to create a personal liquidity event—taking out a large percentage of their company's value in cash, without selling a meaningful portion of the business or signing any personal guarantee. Moreover, the cash dividend is typically only taxed at a 20% federal tax rate. For more information on an InHouse Recap, please view our InHouse Recap section.

Minority Investor

A related option to the Leveraged Recapitalization is using a Minority Investor. In this option, you receive nearly full value in cash for your business but make a slightly larger reinvestment than in a typical leveraged recap and end up owning in excess of 50% for majority control. The private equity buyer would be in a minority position. Not all financial buyers are comfortable with doing these deals, but we maintain good ties to the middle market buyout firms which welcome them.

With either the leveraged recap or minority investor option, to the outside world nothing will have changed. Furthermore, this new arrangement with sophisticated and seasoned partners allows you to tap into an extensive network of financial and management resources. You can take advantage of new market opportunities, achieve new levels of growth, and then take that "second bite of the apple."

Employee Stock Ownership Plan

While a less common transaction tool, the Employee Stock Ownership Plan (ESOP) offers significant advantages to both owners and their employees. An ESOP functions like a profit sharing plan. The employees, in essence, purchase the business from the owners via a leveraged ESOP loan and have a path to eventual ownership as the loan is paid down.

The company obtains a loan from a commercial lender and lends that money to the ESOP, which buys stock from the existing shareholders. Over time, the company contributes to the ESOP to service and pay down the debt. Both the interest AND principal payments are tax-deductible to the company. This tax incentive enhances cash flow and working capital for the company. As the loan is repaid, stock is allocated to particular employee accounts with the ESOP.

Owners get very favorable tax treatment when they sell their stock to the ESOP. As long as owners sell 30% or more of their equity, they can defer any taxes on the gain AS LONG AS they reinvest the proceeds in securities (stocks and bonds) of domestic operating companies, public or private.

However, ESOPs have some major limitations. They are complicated to set up and administer, and require an annual valuation much like a company pension plan. Only companies with stable or strong growing earnings should consider taking on a leveraged ESOP loan.

In addition, if you want to step aside as an owner but do not have good back-up management, then an ESOP is not for you. Usually the owner cannot cash out completely but gets the proceeds over several years as the loan is paid off. Moreover, while you remain in authority, your decisions are more transparent to your employees/fellow owners and possibly subject to review.

The ESOP valuation and purchase price may be subject to possible review for being excessive and a breach of the owner's fiduciary responsibility to the company. Further, since the valuation tends to be aggressive because of the ESOP's enhanced cash flow (provided by the ESOP's tax benefits), it cannot be replicated by a normal buyer. Therefore, it becomes difficult to sell an ESOP company to a non-ESOP buyer at the same multiple.

Private companies implementing an ESOP usually must provide a "put option" to employees, allowing them to sell their stock back to the company at fair market value usually determined by the valuation and under certain conditions: retirement, termination, or resignation. This can have a detrimental effect on the company's cash flow, especially if a number of employees exercise their options at the same time.