EP3 - ESOP Interview with Jeff Forrestall from Forrestall CPAs to discuss ESOP Financing and Tax Planning

Journey to an ESOP and Beyond continues to bring perspectives that can challenge conventional thinking and at the least provide the listener with questions for their advisors.  Jeff Forrestall, CPA provides a good overview of the changes in SBA ESOP financing as well as a compelling forward planning model to leverage the C Corp opportunity beyond 1042.

Transcript

[0:09] Everyone this is the journey to an ESOP and Beyond podcast where we work with and discuss Employee Stock ownership plans really the podcast is meant to be a resource. For those that are interested either in looking at an employee stock ownership plan as a possible way to transition your business or you're an existing ESOP. And you are looking for um ideas around other things like how to optimize your ESOP plan either way it's a full-on resource that's available um through the podcast so if you're brand new thank you for joining thank you for listening um today we get the opportunity to interview Jeff borstal Jeff is a CPA with forced all CPAs so he's the partner at the firm and has a lot of background and experience with. Oh with esops from a couple different Vantage points which we'll get into um but for for right now thank you Jeff for joining our podcast.

[1:04] No thank you Phil thank for having us on glad to to be here and share what we know. Perfect so so real quick Jeff well we want to get to know you a little bit what would you say. And this kind of all time favorite movie that you've ever watched and why.

[1:21] Yeah I'd have to go with the Star Wars. Star Wars I think it's still just the whole Saga there's such a whole uh a deep thing from growing up that way to.

[1:34] We're basically going to uh to Disney and actually seeing some of the Star Wars uh riots and stuffis very the the classic Good and Evil. It's fantastic yep so in within that is there like the old Star Wars of the new Star Wars like the you know the old ones with Darth Vader with the the thing on his weird chest and or the new ones where everything's kind of like more just more modern.

[1:59] I like the newer stuff a lot I think you've got with more money more time even even some of the uh the ones that spin off still enjoy the story oh yeah they got a million spin-offs now now it's cool all right yeah and when I was a kid I grew up the same way I have I had a whole box of Star Wars cards I don't know if you knew what those were butwe collected. Um but we loved it so that's cool um so so thank you for joining I think the the first place to start really is um just kind of what's your background like I know your CPA obviously but how did you um in from your career standpoint get involved with esops in general.

[2:38] Yeah great so.

[2:40] I'm the manager partner for Forrestal CPAs we got about 30 staff um we've been around since the mid-70s my father started our firm and he was an old urchin young guy and I've been here about 30 years and now I actually have 2 of my sons a part of the staff so we're, we've been working this uh area for a long time I have a lot of additional certifications related to this so I'm a CPA I've got a um ABV and a CVA which are both 2 of the, valuation certifications that you would need if you can do a value of business especially when it relates to an ESOP, um also have certifications and from the American Association of professional pension uh actuaries and that's they're not exciting people but by that deals with our TPA business so we actually set up retirement plans we advise them retirement plan so we do that work as well.

[3:33] And I'm also um an auditor so actually audit regular financial statements of for companies as well as um actually employee benefit plans. And so we audit ESOP plan so we see so many different pieces of it and and then just in our regular Consulting practice part of the firm um people always think of uh taxation, when I think of CPAs so we actually help structure m&a advice for our clients who are trying to uh look down the road look at different options to sell their business at ESOP just became 1 of those extra things that we said hey here's another great tool that may work for youso can't do all those services for the same people because of Independence but um. Really enjoy erisa really enjoy seeing what the ESOP can do and how it can be of help and, the other pieces we mentioned some financing I actually sat on the board for the uh small business administration for the SBA for small business loans for North North Georgia and I've done that for about 16 years so we have to get the help and the underwriting processyou are like 1 of those, CPAs that have like you touched all kinds of stuff right and it's like sometimes when people think about their CPAs like they know tax really well or they know audit really well but the thing that you said when you said enjoy odisha about fell out on my chair because like.

[4:56] You know who was going to enjoy erisa for those that don't know what erisa is it is the Securities act that governs retirement plans and so it it really understanding that is a big part, of being an ESOP advisor too so I thinkyou know 1 thing about the world of esops is if more CPAs knew what you knew.

[5:15] Then they would definitely direct their clients to employees out partnership plans because it is a a great option it's not necessarily every option um so that you have that type of resume is pretty impressive because it is it's I think it this Future Part of the world it's like you have to be an adviser.

[5:34] And yes and what I mean by that is like everybody can be a good accountant but when you're an adviser you're like you know what you take you take what you know you look at your client you say all right this is what you should this is what I'm seeing that you can do and I think that's um kind of a really important element of being a value added part of their business not necessarily just. Um like hey here's what you did last year I always call like accountants historians like you you report on what happened last year very valuable but to be able to give them advice on things is critical, you know because there's so many complexities to things like odisha and the tax lawso let's start with this let's start with the financing side again you touched on that. And again that's kind of like what I would say is is atypical of a CPA to be very experienced with financing not that they don't understand it but to be deeper into it like you are, um we all know that an ESOP transaction requires that the company borrow money. To pay for what we would call as the Redemption of the shares from the stockholders eventually those shares get into the Employee Stock ownership Trust are released to the employees but the first part of that is is the company has to go borrow money to buy the shares out and I can do that from a bank and then they can do that whatever is left over from the selling shareholders um when we throw the whole thing into SBA the small business administration um 1 thing that I think a lot of people would say is that.

[6:59] A long time ago or or years ago the SBA wasn't a very good option for esops for for a couple different specific reasons. And I think what we're we're going to kind of unpack a little bit is is we're saying that it is an option now and it's it's a good viable option so let's start at the high level first Jeff like what would you say. That for an ESOP transaction why would the SBA be a good option for folks in terms of high level benefits for them.

[7:27] Yep absolutely so, the spa has been around by a long time been around for a long time and they're 1 of their loan products we would look at that I think would that works well for esops is the 7A program, and this is the it's a type of loan that's actually um used most of this the primary purpose of probability to use the loan is to actually acquire businesses. So if I want to go buy another CPA firm or a car wash or something else I can actually get the SBA can underwrite that loan and. The loan actually comes from a local bank.

[8:01] So which is uh considered primary lenders which is your uh they have to apply with the SBA to be approved um. But with those and that's every National Bank and every Regional Bank and a lot of your small Banks they have this ability to offer that loan to you. What they get for that with the bank gets for that the bank will get a 85% guarantee of the loan so if the business fails the US government reimburses them up to 85% of the loan. Otherwise why would they do it especially when you have small businesses that have a lot of working capital needs and um, have a lot of Goodwill that may be out there so that's what the loans designed for compared to Conventional so maybe you're only putting down 10 to 15%. Down in the purchase price with this type of loan first maybe 20 or 25 that a bank may require.

[8:50] A regular conventional loan uh they're usually 10 years in term uh your interest rate uh can vary bank to bank the maximum is 2 and a half percent above Prime that can that can adjust monthly quarterly be fixed all those things you negotiate with your bank. So those that type of loan has been there for a long time is and we mentioned a lot changed in this world in the ESOP approach uh November of 23 in November of 23 the SBA updated their sop their standard operating procedures to say this is how we deal with different things, 1 of the changes was specific to Esau. So they had esops available before before November of 23 um but to do 1 you had to go through the um, the DC office so you had to goto the headquarters um very cumbersome they were only doing 2 to 4 a year it wasn't very it wasn't worth it they didn't do a lot of them they weren't very promoting of it well they changed that in November of 23 and said hey folks all of our preferred lenders.

[9:56] They can actually do them in-house now just like they can do for any other business that you're going to get. Well that was that's a surprise and I've been lecturing some with some of the bank organizations uh I work with in some of the conferences I'm trying to. Help Bankers understand what esops are like CPAs are trying to learn how this works Bankers understand how this works.

[10:17] Then you compare it so the money is the money there's no difference there if you got a conditional loan if you did a seller finance loan or you did a SBA loan. Couple just point the major differences um you're going to see probably closing costs and fees maybe half a percent to the 3 depending on the bank. Okay um there is usually a guarantee fee. Like I want to maybe 2 and a half percent and that's like if you had a um when you bought your first home if you had an FHA loan, you don't put down much money but they charge you a little bit it's the same thingthey're helping take that risk.

[10:53] And those those fees are rolled into the to the financing correct yes. Yes all the fees can be financed all the fees that we do on the seller side or buyer side can also be rolled out.

[11:04] So oh yeah so like the transaction fees too could be rolled in if they were wanting to absorb that rightyes okay.

[11:11] So that's that's nice with that the banks are interested in doing this compared to, but a conventional loan because I actually have a guarantee there's a smaller limit there's a cap of 5 million dollars you can do on the loan. But it's you know I said hey there's that's where they want, the seller if like working with you fell or another buy side advisor can actually help them structure the deal how much should be in seller finance loans how much could be maybe there's some cash you want to take off the table maybe it's a, at a 12 million dollar value, and we go ahead and finance out 5 now service.off and they turn it you go back and get another 1 so you can do functions you can do stages it's just um. It's 5 and then 7 for seller notes and then come back and. Are there provisions on because there's usually Provisions for the seller note so the is the seller note typically subordinated again like normal so like interest only payments.

[12:09] The uh SBA financing operates like a normal senior debtwhere you have. Do they typically have covenants on there like like you would on a on a cash flow loan so do you see like fixed charge coverage ratios or no um the qualification is a um you have to have a a debt service coverage, of 1.25 right so that's not that's not crazy that's kind of normal, that's not an option um but in the future there's not a requirement as far as operating or what you're able to do as long as you're able to service the debt we pay the loan. No yeah no prepayment phone yeah that's another thing on like the SBA 504 which is real estate you know you have this 50% 40% with you know 10% Equity but you have that that prepayment on the other portion that's kind of been sold off so that you don't have that with a 7A, so there's no prepayment penaltywhat's unique now you they do require that you actually have um the ESOP needs to have controlling interest. So they need to be buying at least 51% and that and that could be a mixture and uh and the SBA funds but they want to actually have a change in control if. If you do sell a 100% of the companyit's like a 100% of the shares are purchased in the combination there is no guarantor for the loan.

[13:32] Not the seller not the new ownership or not not the new management group so that's that's surprising I don't see that too often when No 1 has to guarantee it. Ifif the ESOP is actually owns less than 100% of the shares so you do a partial. And it's more like more than 51 so they're actually for its eligible more than 51 but less than 100 and if the seller still continues to work in the ESOP for a number of years, then in that situation they will ask the seller to get do the guarantee but that's the only time there's a personal guarantee. Got it okay yeah and I think that's I mean that's why it's like looking at, this column of pros and cons right so when you get down to it um those things are going to matter at the end of the day is there what's the typical amortization schedule for the SBA Term Loan versus like what we would know is. Senior debt term loans usually about 5 to 7 years with with also things like debt recapture excess cash flow features which require the company to pay extra principal payments as we go what so what's the typical structure that way.

[14:41] These are uh it's straightforward they're they're Provisions for the police officer there aren't that many of them so these are old loans the 7A have been around uh since the beginning of the SBA so it's it's not a new program it's a 10 year amp.

[14:55] If you you may go out further if a if a higher a mixture of your assets or equipment or somewhere maybe even a building or something and then it could actually, push out longer I could actually do this since as you mentioned in conjunction with the SBA 504 and that's your bricks and sticks slump where you're buying buildings, land long-term fixed Adventures but but with this it's usually a 10 year no prepayment penalty. Um there's no covenants you do have to send them the financial statement once a year which you have to do that anyway just being part of the ESOP so not there's not a lot of um. Future issues with them as long as you make your paymenttherethere's there's no other uh covenants or compliance yep. Cool now I think that's good I think that's from an SBA standpoint I I think there are definitely some changes I personally professionally haven't seen it be a big part of the ESOP lending world but, I think it could be and I think that the bottom line is it's something just like everything to investigate to see if it's a good option versus you know what what you're what the companies may be getting quoted. Um from from their Bank 1 thing too with banking. Our finance when it comes to the transaction is I I I always like to try to keep everything in the the same comp the same bank that they started with just because.

[16:14] Well it's a nightmare to change Banks I mean the accounting the accounts that have to be changed or the treasury services and everything else so if you can you know I think the first conversation is with the incumbent Bank you know do you do ESOP financing and if you don't you do this kind of financing I think that's a good way to to keep it because I think. Keeping that relationship consistent and if not then yeah then you go to the SBA preferred lenders.

[16:40] Yeah you would if your existing Bank may not do ESOP conventional but if they do if they offer SBA Loans then they could do this. Yeah so yeah that's right maintain where you are um and also you can also refinance a loan let's say if you're you're past your stock appreciation right period or um, and your warrants are up and you actually decide hey I'd like to go ahead and pay this, you can refi for the other ten years and take out the loan so there is the eligibility at any point if you, if a seller wanted a little bit more accelerated cash and a the company wanted a longer repayment period for 10 years then they can reduce some of their risk if they felt like there was risk and actually get some of the cash outs stable. Yeahfrom from the the 1 question just popped in my mind too is this idea that you have. The old rules were the SBA said hey the owner has to leave the company within 12 months.

[17:35] The new rules are they can still be therecan they still participate in the ESOP and still beyou know eligible part as part of it under the new SBA rules. So yes yeah they can they can still participate without getting into like the 1042 questions of family, yeah but there's no they they have finally dealt with this partial change the SBA has finally realized, you don't have to sell the whole company you it's it's actually advantageous for an owner to maybe stay around that would probably make the loan more successful absolutely yeah yeah I mean I always think that too I'm like why would you. Lose um the in the transition the person or persons you know that being the shareholders that have had you know the most experienced at running the business and suddenly you don't have that anymore it's like you just cut off. A big chunk of the value of the business in a sense um that's what I always liked about esops is they're they're always kind of part of this. Going forward I mean at least in the board of directors maybe they exit out their position but they're at least they're part of this and you can come back and say hey what what about this what about that so it's a great aspect of being an ESOP company is transitioning slowly you know those roles so I'm I'm glad to hear that. They're okay with that and I never understood that why you would want to get rid of themum the purpose was always there there were worried about people cashing out to really weren't making a change in ownership.

[19:03] Oh that's what business to my employee turned out my employees but like by to buy relative or partner or somebody else and you're still there they said well did you really sell or did you just get a pretty good loan that we took a bunch of risk on. Yeah but that's that's pretty that's weird that I'd heard that was the reason why but I think they realized with an ESOP. There's not that uh concern people are trying to you have a trustee you have a board you it's a real operating venture, yeah and especially because you have all these rules like with orisa anyways you know with the way that the the the company structured They'll Come Away the company is run the way that they have they have typically a trustee um and then you have 404 with the IRS, codes you have 4 or 9 p with ESC Corps all of those things so it's yeah so so I think that's really a good thing for people to know and I you know as we kind of close that SBA financing thanks for kind of sharing that because I think it's helpful for people to say hey maybe we should consider that um, typically what I what we would say whoever your sales side advisor is they're normally the ones that are going to go Source financing um but they're there's certainly no reason you can't go talk to your bank yourself like you know so it's not like you're out outside of your boundaries um just like you would ask for a working capital line of credit I mean this is just part of doing business but it does help to have a sell-side advisor because.

[20:26] They're going to usually be able to share with the banks um the way that the structure of the ESOP deal is going to be put together. That's going to include cash cash flow modeling it's going to include um you know calculating the tax benefits of the cash flow model it's going to include um there's this comply with orisa all of those things are going to be helpful for the bank, and those are things that may not be currently available to you you know if you're just trying to Source the financing yourself so, consistent add-on yeah I would put I agree I would not. Want to go to it because it's new a lot of these Banks it's a new process in the last the last 14 months um. A bank is going to be much more comfortable with the sell side advisor to help walk them through where it's not their first rodeo. Exactly yeah and see you you being a CPA that understands esops right so you being part of that is really helpful.

[21:19] So 1 of 1 of the things and you went through your resume I'll kind of just start pulling out things and we'll talk about them so you you talked a little bit about being a Tax Advisor.

[21:27] In addition to being in an audit like a good auditor right so and then you have this retirement planning on the tax side umtax is always really important when we talk about esops because you know there's tax benefits that are very very very particular to Employee Stock ownership plans and they don't relate to anything else so but well if you go back to high level we have any company that's going to transact as an ESOP is going to be either an S corporation or a C corporation because it's a stock sale, um we were basically trying to sell stock of an of a corporation when you're either going to be incorporated in these 2 different um types of of companies. For your site Jeff let's just talk a little bit about your practice because you um not only do you help people guide you guide people towards ESOP as a viable option you also help guide them towards this decision between an S and A C so let's let's talk a little bit about the process that you guys go through and helping companies decide. Before we're in ESOP whether you should be an S and a c and then we'll talk a little bit about being an ESOPperfect yeah well definitely we, as you mentioned earlier um CPA is too often we've many years of focused on just compliance did we just get things done and the whole industry has moved more toward advisory which we still have to do compliance we need the Advisory Board of your think is a good advisor.

[22:48] Do hopefully your CPA or if you are the CPA or asking your clients what is your 5 year plan. You know have some projections have some thoughts where are you going um because eventually don't wake up and realize hey I like to sell my business there's some structure you can do to prepare now to get there.

[23:06] 1 of the structures we look at is to say well depending on different needs if we have a large cash flow need, and your your business is established and successful and you have a large cash flow need for maybe Debt Service or you're trying to uh build working capital you're trying to acquire somebody a Sikh work may be a great answer. And that's that's contrary to a lot of CPA thought because 99% of all small closely held businesses are escorts that that seem to cross but it makes you stop and say wait, wait a minute if I'm not going to take this money out of the company I need to pay down debt aggressively I need to actually uh grow working capital I'm trying to have a need for it internal.

[23:48] How many folks end up getting a K1 and they're paying income tax rates that Federal 35 38%. If you didn't take the money we left it in the company CC Corps today are 21. That just let me the difference in the company to Debt Service and operate.

[24:05] Now I still can have an escort next to it the management fee and get my cubed and all these other great tax benefits and I think just as you're saying is you need a good. Um silicide advisor with an ESOP transaction you should have somebody has is not just doing compliance for you but kind of thinking of what your strengths. 1 of the great things dude I've talked about is this old code code section that came around from the 1986 with the original Ronald Reagan. Tax reform act it was actually cotex in 1202 so it's not a new rulebut if you happen to be a c court and you are for 60 months.

[24:40] And you go to sell your business, it's actually tax-free there's not a lot of there's tax deferred but usually kind of like you usually get my attention pretty quickly tax-free. So that 1's out there and there's some rules to it um and you can't it's not a last minute decision you know hey we need 60 months so there's a little bit of planning in there that that may work there's actually, a way that we've worked with in doing this if if you you could be existing escort for 10 years how I value your business lower. And I'll lock in with the discounts and things and I'll create 2 classes this will help with that too technical get some A and B shares lock in my Redemption on my a. At the lower value I can get and I have B well B will grow, tax-free under 1202 it it's that's more for attorneys and CPAs kind of yeah that's not too technical though I mean I think part of it is a strategy that I don't think a lot of.

[25:38] People think about and that's 1 of the reasons I wanted to kind of pinpoint it a little bit um and I'm gonna can it be real kindergarten in a sense because it's when you talk about taxes like what taxes are we talking about for people so first off we have to categorize income tax and we have to categorize capital gains tax so in contemplating the sale of the business we're always going to be talking about capital gains tax because that's when you're selling your asset your Capital asset and then you're being taxed on the sale the purchase price minus the what you bought the the asset for it's like anything Capital that's capital gains tax income tax is the tax that the company is going to have to pay as a C Corp based on the income it it is um recording from a federal and then also a state level depending on where you are um residing in depends on the some states don't have state income tax, um the other part is when we when Jeff's talking about 12:02 is these are code sections so you know where that comes from is is what the IRS allows now 12:02 at 4 is specific to a Corp and it's for, the transaction it doesn't have to be an ESOP sale it's just simplyyou sold you're a Corp and you sold and what Jeff's strategy is I'm just kind of like. Summarizing again what you said pretty well is that if you can anticipate that and this is where I would say that that I see a huge Value Point for you guys is like you don't see people asking a client to do a 5-year forecast.

[27:08] That that that typically doesn't happen for CPA because the CPA is like oh I've got a big deadline just give me what you did this year I'm gonna record it I'm gonna tell you what your projections are this is what you owe and then moving on to the next. You know a client and honestly that's part of what I think a lot of people would complain about if they were like hey honest like my CPA is just getting the stuff done. But to actually create the strategy of saying let's do a 5-year forecast. And I know your evaluation person too so it's like let's let's interpret that from a multiple levels and we're interpreting that to be where your working capital is growing what does that translate in value and how does that what's the best tax plan considering those 2 things if we know we're going to do something in 5 years.

[27:53] Which that kind of break it all down that to me is is really helpful and now you throw in like okay well if we do convert to a c then we have the options to get creative with A and B type stock.

[28:06] And then now we're structuring it forward forward based structuring.

[28:11] Sad to uh rcpa firm as I can bear with us to see Court which is kind of I believe it enough I think it works and the biggest reason to throw on top of that uh that we did it was B shares. There's some great managers some great people who um I don't want to lose them and they're they're key to the business so I create a B shares I have all the a these guys are G I gave them a bunch of be. And B has different conversion rights and I put a make up what I want so I put a little bit of dividend their form based off gross but they can actually say they're a partner, because for some of these people they're just they didn't say money so they could never buy in. And their spouse who made divorce him if they actually took that kind of risk and borrowed money and bought in so it gives you an extra option so I like that from a management piece as we talked about you know building your eventual replacements. Mhm yeah now it creates some some flexibility um.

[29:06] For those I think that the I I guess the other side of the equation if you go to a c that people are going to say first off is you have double taxation so the company gets taxed dividend and then get taxed on the income and then the individual shareholders get taxed on the dividend in your model you're saying we're not going to do dividends anyways because it's going to get rolled into the total. And eventually we're going to have this 12:02 anyway so um the other side of the argument is that a Corp. Doesn't increase its basis every yearbecause an S corp has an accumulated adjustment account increasing basis for what's not necessarily distributed so in a in your strategy is like we don't we're not even worried about that because the endgame for first off the in income tax for each year. Won't matter because we're really just going to keep all the money in there anyways which honestly is what happens with a lot of these s Corps is they just, you know they don't want to get Bank financing anyway so they just keep all the money in there and they're like it just rolls up and there's this big AAA at the end that for an S corp sale we're going to have to deal with anyways.

[30:10] And then the other side of it is is with the 1202we're we're done and um and I and it's not like I think these kind of things is this is not your strategy everybody this is just something to think about and talk to your advisor about so hopefully we're not like the disclaimer here is um both Jeff and I are not saying this is what you should do this is just things to consider that you may have bought differently about based on.

[30:38] How you're getting advice soum so I think that's important um to to disclaim but it's honestly not something I've seen people do a lot of you know as you I would agree most of these companies are s corporations um everybody's super familiar and super comfortable with that in a sense for a lot of good reasons right and at the same time this is 1 of those things like wow let me think differently about this for a second.

[31:01] Even for our form like I have a side company that's an escort and that's where I take W2s, um good W2 from the core that you're supposed to do even if like post ESOP, you have to be employed I'm establishing reasonable weight but the pay is management fee to my escort so I manage the bottom line exactly what I wanted to be each year to the dollar to build up the working capital at 1. So you you get some extra flexibility but like as you mentioned if you are not eligible for 12:02, like there are certain industries that are not eligible pretty much if you like a professionally licensed person a CPA doctor attorney Dennis that that you're part of the no you're not going to get that well then you would be eligible to see, if you when you do sell. Then you can actually potentially do a 1042 so that's some just options and I think that that's the thing to to think about is um. Really do dig in reach some of the NCO books talk to good advisors talk to these other uh people um because it's not cookie cutter. No it's not cookie cutter 1 thing too and and this is something we talk about all the time. On the podcast is it's so much better when you forward planand this is true for the ESOP transaction, this is always true for estate and gift tax planning this is always like this is always true like to have like a 5-year window you know I think some people.

[32:30] Companies get so busy and the advisors are so busy too so it's kind of both the advisor's role I think is just slow everybody down. Make sure that they have enough time in their schedule to deal with their clients in a way that that's productive and value oriented but but if you do this you can really start thinking, um more strategically about what's going to happen in 5 years so if you're if you're in your 50s and you're like I'm not worried about that until I'm in my 60s I don't think that that's good thinking because I think you know at the very least whether you're doing your entity plan your what we're talking about working capital plan the valuation plan, you still need to make sure you plan your management succession which is honestly the biggest thing I see is people from a non-financial standpoint really don't have an exit because they haven't groomed that next person to take over their roleand then they're wanting to get out, you know and they're like hey what do I do and I'm going to say like the esops not going to get somebody out of their business it's just not going to be the magic pill, um it's part of the planning but if you're a 5 years out that's 1 of the things I put on my 5 year plan like assess where you are with management transition and be honest about like.

[33:41] Who should be doing what job and how do you going to get out of your I mean I always ask myself how can I get out of my job right now like who's going to do my jobum. Because I don't want to do I don't want to work myself to death right but partly too I know it's healthy for our business to do that.

[33:58] Well you know add to that what the peace of mind um I'm just very passionate about esops they come with esops is the guy told my staff I committed to them and 4 years and, at the end of last Force now we'll end up uh I will sell my I'll sell the firm to an ESOP.

[34:16] I'm going to say if a local Park from my kids my my boys to my boys work for us so they'll have an option there but I'm so majority there because I want the Next Generation to keep over we didn't look at we looked at mergers we looked at all these other options and decided that this is the culture and everything that fits best for us but the Peace of Mind Of Me Knowing. That's another date I know the date is going to happen I can do some SBA fighting I can take back a note I get all kind of different structure in it but I believe enough in this that that's part of my plan and I think my management, those barrier that they're trying to prepare to get ready for that day where I can step away step away as well where you know we, does having this tool of just knowledge about the ESOP and a little bit about the financing and different tax structure and giving us time.

[35:02] And like you helping me with a lot of my clients because we we do part of this but then I I need to step back um but we've done deals where I've seen clients have values at 180 million down to 2 million, and then there's there's no big there's not too small um and the way I explain it to clients um just as an option because it all depends in your structure. Hey something to look at especially if you've considered equity and you've seen some in a lot of my clients have gone had Equity people come in try to buy them, or they don't have anybody to buy them at all and they're frustrated and that but. Like you and I both have done valuations and they'll take the lowest of the prior 4 or 5 years and give us the lowest value they can.

[35:45] Esops looked to the Future Would you file your projections which is why I asked you where you're going in 5 years keep your 5 year projection up yep I've never met a projection I didn't like. Why would I project us to make less moneyso usually the projection when it's generate a 1520 percent higher value. Then if compared to equity who's taking my worst year um and I could possibly get this tax deferred or tax-free.

[36:11] And I can choose when it's it's it's checked so many box boxes for our clients just to uh, and that goes against the grain of a lot of people think oh esops going to be the lower value and it and it doesn't necessarily mean that it's going to be the lower value it really is, and more of it depends on the details um. 1 thing I really like about the approach too and because people ask me this all the time like when should I tell people about what we're doing. If if you do have this real strong game plan like you know, Jeff you're gonna plan this out you've already got it down to the then you you got down like the the schedule like I it's in the future and you can always Flex that plan but you do know the path forward you can share that with your people and people that work for a company, there's a desire for shareholders and key managers to share hey what are we doing right so the more that can get detailed in a in this plan the 5 year plan becomes way more than just the valuation everything else it gives you some key tools to have confidence to share that which then builds you know what a key element of any business success which is I got Buy in, I've got consensus I've got my my people are really excited to be here um the worst thing that can happen is nobody says anything about anything everybody's assuming the worst.

[37:31] Oh you're gonna do this weird thing and you know I know I can't trust you so what you're talking about really is helping build throughout an organization a solid trust Foundation.

[37:41] The whatever comments I try to help them understand to make this a little simpler I said hey guys think about what we're doing. Instead of paying tax we're taking what would have been our income tax dollars because now post Esau esops is a retirement plan doesn't have to pay any taxes.

[37:57] And we're not getting to the government we're giving it to you. More more be more competitive I can pay more in wages I can spend I can grow more I can acquire someone else but it's it's not it's really I'm taking what would have been even as a c Court say 30% of our profit and paying tax well first we pay the debt off and service that and the rest goes to the people. Great great play brilliant right yeah you know we're we're paying less tax we're taking tax from the government but we're giving it to our people.

[38:30] Cool I got us on this tangent but go back we're gonna go back to the tax first um 12:02 we covered that um so your existing Sea Under Jeff strategy you if you don't the 122 doesn't apply. The 1042 is another code section that you allows you to defer the capital gains setting up a qualified replacement property. Um so knowing that of course if they do the 1042 I think the thing that add-on is you can't be eligible as part of the ESOP in if you have kids in the organization they can't be part of the ESOP either you can create a phantom plan, to adjust for the kids, but it can be a little bit clunky so so 1042 again is just code section but um I thought that was important to to kind of throw out when you do this can you convert right back to an S though, so you can get you can get the the treatment on the capital gains and then you can you flip it back to an S to become exempt on taxes.

[39:21] So after 5 years right so you can um if you stop being asked you can't to like back in for 5 years so it may be of the 5-year period of waiting when I look at the waiting you know I think the first 5 years was an ESOP we're not Distributing any cash we're trying to Debt Service and build up our Reserve anyway so. That's that's okay um we can always do dividends and profit share 25% of our our payroll as a reduction anyway so between the 2 um, you know guaranteed dividends or preferred dividends along with the uh profit share contribution I can usually add I've seen I've been able to manage the same result of being almost tax-free is a core. Because I'm taking the profits I'm getting these deductions you're getting the duct yeah I moved it over. So but if you so let me go through this make sure I'm clear so if I'm a I'm not an I'm not an ESOP yet so I'm an S corporation, I convert my S to a c and we do the things you're talking about doing and I say that way for 5 years and then I transact and I take the 12:02.

[40:24] Okay now at that point. I can't I go right back to being an S because I've got the 5-year window absolutely yes I will say yeah my example the clarify that was you were an S today, right you meet what he decides you need to he tells you aboutlet's convert you to a c.

[40:43] Well if you do the ESOP tomorrow you need to wait 5 years that's right if you had some, and we stopped to ask when to see waited 5 years to get the 1202 then yeah we're go then flip right immediately to the nest. Yep yeah so I think that's important that's and that's kind of coming back to that forward plan because then now I've I've captured all the best things if I had 5 years to wait. If I don't have 5 years away and an MNS what I would say is you want to analyze, the SCP ESOP versus the CCP and say because you are going to be under a 5-year window, the core Bop could win if the 1042 benefits are so valuable and like you said you can massage enough to get almost to the same result on the TA on the tax savings of being a Corp but the S Corp for just pure exemption standpoint it's just not going to pay income tax so it it it simplifies that so all I'm going to say is that that analysis needs to be done by your advisor it needs to be super clear, and you need to ask questions 1 thing I see happen, is that some people get sold in a sense you have to do this you have to be this you have to be that because they're getting a fee off all these things you know and. Ask I mean I always ask like ask your adviser like how are you getting paid because if I'm if I'm there to sell you a 1042 guess what you're going to be a C4 all day long.

[42:03] You know because I'm making money on that your advisor needs to be objective and agnostic to those different paths and give you the analysis, so clearly that it can pass you know I would say the um the rule is if you work for an engineering firm I mean it passes like they've they've read all the details right they need to ask questions to make really understanding that this really is the right thing for you come back to your goals and objectives and say do these fit our goals and objectives yes yes yes then do it whatever that is but you need to do agnostic analysis on both those.

[42:37] No not not definitely concur, yeah there's a lot of B's involved and things but I I've seen small esops that said there's not so I've heard some people say it could be too small for it to work that's because not always but it's possible that individual saying that comment uh their fee is based on the size of the deal and the success of the deal.

[42:57] That's right I think that's the attendance part of people you know you went independent good folks you're going to give you um straightforward so at least you have the clarity in their, so I'm also an investment advisor so I help people with the 1042 sock and a lot of those um if you do that just a small caveat in there, you don't have to go into fixed income you that's a whole another podcast of what you can do that is anotheryaI don't know yeah you know everything Jeff like that's like you're hitting every category right you know talk about yeah wearing every hat so now let's do that next like next time you dig into that deeper because that's a whole.

[43:37] Another area that I think is again clouded and people's minds like what do you actually saying right and that's why we do the podcast like just give it to me like. A a Layman so I can make a business decision that makes sense right because it's like throwing curveballs sometimes so we'll do that we'll do that 1 next but um we're kind of almost out of time here real quick as we kind of summarize we just kind of covered SBA financing for esops we covered and you know tax selection for ESOP and then kind of more forward planning, um as it relates and we touched on a lot I think really good points um, when you kind of 1 of the things I was going to finish with when you counsel people and I I think you're just really good at this as an advisertowards an ESOP um what what do you think that you kind of pinpoint the most in terms of your you know top 3 things that that are helpful for your clients so yeah the ESOP really is right for me.

[44:35] I think a lot um is is it a sense of a family. And that's that's the biggest 1 I say that say for myself is for other people I've got this key management group and these people uh maybe it's a mult you've been here a long time you it's kind of your baby you've made it you want to continue on for um you'd like to step out maybe they want some of the lower riskbut oftentimes it's not sell to another owner who may. Change change management and change and change in leadership or in Equity Group who uh really just wants to catch up later and sell you again and I think that. I find that 1 most common they want to continuation but there is no 1 at their company now through individually as the cash or the financial ability to take them out. Mhm.

[45:25] So that's I think that's probably 1 of the key when you start mentioning hey I could get you a higher valuation most likely with the projections when ESOP verse Equity so if I get you higher value. That that gets attention and there's a probability we could either defer taxes or completely avoid taxes if you give us some time. Yeah that's usually. These are solid right and that's and that's kind of what I I think it's helpful for people to like look you know once you know those conceptually. Then you have to ask the question how did that you know go do the work now how does that apply to me as a business um to vet out but those are you know I would relate the the the first 1 as hey that's your legacy business. And in your culture like and then you know emotionally speaking. And this is where you like business transition ownership transition a lot we're always going to be dealing with psychology and emotion if you think you're not then you haven't yet tried to sell your business because people are like this is their baby. And when they look at that not only that they care about their employees. Um they kind of they just care about what they've invested their life into emotionally, in terms of what is this and there I think for the most part for ESOP companies or pre-op is this means a lot more than just money of course money is important. But it just means a lot more than just money and then when you look at what can happen like you said it can just get cut up into pieces um to serve.

[46:54] Somebody down the road but it's not going to be the same business that that really does I think motivate people to think about this a little bit deeper than they might have before so.

[47:04] No very well I agree. Cool well great great to talk Jeff I appreciate it I think it was super helpful um so as we close out thank you for for your time today and we really appreciate it.

[47:17] No thanks you have have me on be glad to come back and talk about. The variety of subjects and be glad to talk about any of this with uh anybody who listens to your podcast it's a it's a passion for me the more we can educate people I feel like I'm saying as you, I just want to teach you and it's kind of it'll help spread more for uh benefit more people. So real quick for your for your plug is you know forced all cpa.com is that what you guys are website um yeah with an S 4 stall cpf. Of course I'll cpas.com we're in a North Atlanta and Buford Georgiaso if you look us up should be able to find us. Awesome well check check that out and contact Jeff if you have any questions that we that we covered um for everybody else thanks again for listening go to our website journey to an ESOP cam for any questions you might have that we that we want to cover this year, and um or if you want to know more about the specifically how this would apply to you then certainly reach out to us there and then for everybody else thanks for listening and we'll continue on our next step on this journey to an ESOP.