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20TH ANNUAL ACG CAPITAL CONNECTION

ESOP Succession in a World of Mergers and Acquisitions

here are four What two important tax benefits did shareholder, the ESOP trust. Shares are
primary exit Congress give to ESOP’s? allocated to employees per the plan design and
Tstrategies shares are held in their name in trust for their
for most business One, if an owner sells to their employees via an retirement. Therefore, employees cannot see
owners. Family ESOP, they can receive proceeds from the sale ﬁ nancial information; sell the company; or make
succession, of the business tax-free, eliminating the need to management decisions. Studies prove ESOP-
management pay any Capital Gains taxes on the proceeds. This ownership has an immediate, positive impact on
buy-out, third means owners in Texas will receive 20% more of the retention; lowers employee attrition; increases
party sale (private proceeds after-tax by electing a 1042 exchange. In productivity; and are more resilient.
equity or strategic other states, the tax savings will be even higher.
buyer) and ESOP Two, under ESOP/S-Corp ownership, the company What is my role as an owner?
succession. will not pay any federal or state income taxes (in For many owners, the ideal retirement time frame
DOUG JANOWSKI However, an ESOP most states) going forward. This is because the is still ﬁ ve to ten years away and they have plans
Managing Director, is the one least company’s earnings are ﬂ owing directly into a for the business, along with concerns for the
Lazear Capital understood by Qualiﬁ ed Retirement Plan (the ESOP). Similar to success and well-being of their team who helped
Partners owners, yet is a 401K’s which do not pay income taxes or cap gains, bring their vision to life. However, there is also
universal buyer nor does a company whose stock is 100% owned need to separate personal ﬁ nancial success and
for almost any by an ESOP. Taxes are paid by employees as they family/wealth/estate planning from the business’
proﬁ table, successful company. retire and receive funds – just like a 401K plan. ﬁ nances in the short-term. In an ESOP, the owner
At the highest level, an ESOP is a tax- How much does an ESOP pay an owner can stay involved in the business directly as CEO
or indirectly as Chairman of the Board. The biggest
advantaged structure created by Congress for their company? concern is being sure the company has the right
with the Employer Retirement Income team and plan in place to meet the company’s
Security Act (ERISA) of 1974. The goal was An Independent Trustee and the Trustee’s valuation forecast and future earnings.
to encourage owners to consider selling ﬁ rm will negotiate the full fair market value for
their companies to their employees versus the company. There is not a proﬁ t-motive for the ESOPs can be a tremendous succession strategy;
an outside buyer. There were several Trustee. They have a ﬁ duciary responsibility to delivering value to everyone involved in the
reasons for these incentives – to create represent the employees. In doing so, they want organization and surrounding community. While no
more business owners (often 100’s to to ﬁ nd the full fair value and see the successful one can say whether an ESOP structure is the right
1,000’s of new employee-owners at a time); creation of an employee-owned company. solution for every owner or company, it is always
to provide more retirement savings for Who owns the company going forward? worth taking the time to understand if this structure
employees; to reduce taxes; and to help might be the best option for meeting the owner,
keep communities intact. In a 100% ESOP structure, there is only one management and company’s objectives.

Financial KPIs to Keep Track of in 2024

n the ever-evolving capital expenditures. A high ROI means investment changes) and adjusting business strategies accordingly
landscape of gains compare favorably to their cost, signifying can help manage the impact of economic ﬂ uctuations.
Ibusiness and favorable allocation of resources. Strategies to mitigate these risks include diversifying
ﬁ nance, staying 3. Operating Cash Flow: This KPI measures the cash income streams, maintaining a healthy cash reserve,
ahead involves generated by a company’s regular business operations. and regularly reviewing/adjusting ﬁ nancial forecasts
understanding Positive operating cash ﬂ ow indicates that a company and budgets.
the current trends can generate more cash than it spends. During
and predicting volatile market conditions, a strong operating cash 1. Technological Disruptions: The rapid pace of
future changes. It is ﬂ ow indicates a company’s ability to maintain stability technological advancement can lead to signiﬁ cant
increasingly critical and invest in growth. Companies can improve their industry shifts, creating new competitors and changing
for businesses to operating cash ﬂ ow by enhancing revenue streams, customer expectations. Businesses should invest
monitor Financial KPIs managing inventory more e ciently, and optimizing AP in continuous innovation and technology upgrades.
SANA (Key Performance and AR. For instance, adopting new ﬁ nancial management
SUNDRANI Indicators) to ensure software can improve e ciency and accuracy in
Partner, NOW CFO they are on the right 4. Debt-to-Equity Ratio: This ratio measures the degree tracking KPIs.
to which a company ﬁ nances its operations through
track towards ﬁ scal debt versus wholly-owned funds. An optimal debt-to- 2. Regulatory Changes: Changes in laws and
health and prosperity. equity ratio will vary by industry. In general, a lower regulations can impact various aspects of a business,

The Most Important Financial KPIs of 2024 ratio is preferable as it indicates less risk. Companies including ﬁ nancial practices, reporting requirements,
and operational compliance. Companies should invest
with high debt-to-equity ratios may struggle during
1. Net Proﬁ t Margin: Calculated as net income economic downturns as they must service their debt in robust compliance programs, train sta regularly,
divided by revenue, this KPI shows what regardless of operating performance. and seek advice from legal and ﬁ nancial experts to
percentage of each dollar earned translates into ensure compliance and minimize risk.
proﬁ t. With increasing economic uncertainties and 5. Current Ratio: The current ratio is a liquidity ratio that 3. Market Competition: Intense competition can
varying consumer behaviors, companies need to measures a company’s ability to pay short-term and pressure prices, proﬁ t margins, and market share,
focus on both increasing revenues and e ciently long-term obligations. A ratio above 1 indicates that directly impacting KPIs. Businesses must di erentiate
managing expenses. Optimizing supply chains, the company has more current assets than current their products or services, improve customer
investing in cost-e ective technologies, and liabilities, indicating good ﬁ nancial health. A strong experience, and identify niche markets to stay ahead.
current ratio will be particularly important to manage
targeting high-margin products or services can unexpected expenses or economic downturns. Regular market analysis and competitor research can
help businesses enhance this KPI. Improving this ratio by managing inventories more help businesses make informed strategic decisions.
2. Return on Investment (ROI): ROI measures e ectively, speeding up receivables, and managing 4. Cybersecurity Risks: Data integrity and security are
the proﬁ tability and e ciency of an investment, payables strategically. crucial for maintaining the accuracy and reliability of
calculated by dividing the net gain from an ﬁ nancial reporting. It is essential to invest in robust
investment by its cost. ROI helps businesses Threats to be Aware Of cybersecurity measures, including secure data
evaluate the e ectiveness of their investment Economic Fluctuations: Keeping an eye on economic management practices, regular security audits, and
decisions (e.g., in marketing campaigns, R&D, or indicators (e.g., inﬂ ation rates and interest rate continuous employee training.

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