Name: Live Webinar: Employee Stock Ownership Plans (ESOPS) & Partner and Management Succession
Uploaded: 2025-10-30T18:46:12.141Z
Duration: 1 h 31 min 55 s
Description: Live Webinar: Employee Stock Ownership Plans (ESOPS) & Partner and Management Succession

Transcript for "Live Webinar: Employee Stock Ownership Plans (ESOPS) & Partner and Management Succession": Good afternoon, and welcome to the second session of our private owner succession academy webinar series, employee self ownership plans and partner and managing succession, hosted by PKF OConnor Davies. Before we get started, I'd like to go over a few questions so you know how to participate in today's call. We're pleased to offer live closed captioning throughout the webinar. To access the captions, please use the stream text link located in the chat section of your attendee panel. You will have the opportunity to submit text questions to today's presenters by clicking on the q and a tab on the right hand panel. You may send in your questions at any time during the webcast. We have a lot of material to cover, and if one commits, we will make an effort to respond. If we cannot get to your questions, a response will be sent post event. Today's webinar is offering 1.5 CP credits and specialized knowledge. Polling questions will be launched in the polls tab on your right hand panel, and you will need to respond to five of the polling questions to receive credit. When the polling questions are launched, the polls tab will then appear. CPA certificates will be issued within eight to ten days via email. A copy of the PowerPoint slides and a recording of today's webinar will be made available to you via email four business days post event. As we near the end of the webinar, we do have a very short survey which will be prompted, and your response is greatly appreciated. At this time, I would like to introduce welcome our speakers to the stage and pass it forward to Cynthia Adams Harrison, managing director with PKF OConnor Davies and Center for Product Business Owners. Cindy? Thank you so much, Arlene. Such a pleasure to be here. I wanna welcome all of you to our second annual Center for Private Business Owners Succession Academy. We hope you will walk away from the academy with an understanding of succession planning process and how important it is to be proactive and depending on your particular situation that implementation can take a number of years. That this process requires a multidisciplinary team of expert advisors to develop and implement your plan. Your personal and business needs are very much intertwined in this process, and both areas may impact the decisions you make. Of the potential issues and challenges you may face when developing and implementing your plan. The academy and the three webinars are organized around the three options that most clients and business owners face, an interfamily transition, an employee partner transition, and the ESOP value proposition, and a sale of the business. Today, I am so very excited to introduce to you three extremely knowledgeable experts on employee and partner transitions and the ESOP value proposition. John Vitucci, who is with us as partner of PKF O'Connor Davies, David Partys, Esquire, Polsonelli, PC, and Himanshu Chaudhry, managing director of PKF O'Connor Davies. We are so thrilled to have these gentlemen with us today, and I'm sure that those of you watching will certainly walk away with a very different knowledge base than what you have at this moment. So with no further ado, John, I would love for you to kick this program off, and thank you gentlemen so much for being here and for everybody out there in the audience watching. Thank you. Hi, Sid. Hi, everyone. Cindy, thank you for the nice introduction. Look forward to speaking with you all today. Just to give you a quick background on myself, I've been doing ESOPs and employee benefits for about forty years. Started my career at the IRS, worked for a big four firm where I worked on probably a 100 ESOP transactions for large companies. The last fourteen years, I've been focused on the private company space doing ESOPs, and, I also teach in the actuarial master's program at Columbia. So let, Manju go next. Good afternoon, everyone. Looking forward to speaking with you all today. My name is Himanshu Chaudhry, and I have, more than 20 of experience in multiple areas, including employee stock ownership plan advisory, transaction advisory, consulting, corporate finance, and valuation services. So prior to joining, PKF OConnor Davies, I was a director at a leading financial advisory firm where I was advising middle market companies on ESOP transactions and also managing valuation updates for the trustee for ESOP clients. So I have, successfully led the sell side process for a number of companies across different industries and different states in The US. And, I really, like the ESOP advisory space and looking forward to speaking with, you all today. David? Thanks, Manju. David Pardes, I'm an ESOP attorney in, Philadelphia with Polsonelli. We are a firm through it's sort of headquartered maybe perhaps in Kansas City, but we have offices throughout the country. I think about 23 of them. I've had the good fortune and opportunity to work with the team at PKF OConnor Davies on many ESOP transactions, and I look forward to talking with you guys today. Thank you, David. So we'll get started. So you know, the first question is, you know, why are our business owners liquid? Very common. A lot of businesses are set up for, you know, lifestyle and then it kinda switches to value. You know, 80% of their wealth is in the business. They're they're just focused day to day on the business. They're they're not familiar with a lot of the possibilities. Some inertia, bad advice. A lot of private companies. Their their their focus is it's pretty much the key employee is the business, and, many private companies don't have a next layer of management to take over. So selling you know, there has to be some restructuring or realignment in the business to get the company sales ready. This is an interesting slide that I always show when doing any presentation that relates to taxes. It kinda shows the trajectory of taxes for the, you know, for both individual rates, dividend rate, and capital gains rate. And if you were to look at this slide, you'd say, wow, we're at the lowest rate of taxation in the to individuals in the last sixty since 1962. It's a little misleading because back in '62, you had a deduction for almost everything. Today, there is a lot of deductions that aren't allowed. So, anyway, the tax rate is a very important concept in in doing succession planning, especially especially with an ESOP. One of the, the the important things for an a business owner to understand is what are your options? You know, what what kind of sales opportunities you have? And it's probably prudent for an owner to look at all the different options before they settle on one. The first one is listed as called a leverage recapitalization. And that what that basically means is if you have a business, you borrow from a bank and then you dividend out or distribute that lending out of the company as long as there's no seller guarantees. Leverage recaps are very popular with private equity firms. If they can't sell a portfolio company, they'll do a leveraged recap. Sometimes you'll see a private company do it if they're not really a taxpayer or if they have a lot of, let's say, depreciation or credits. The other opportunity to get a monetization event is a third party sale, and that could be private equity or that could be to what's called a strategic. A lot of times private equity might do what's called a holdback, which means you sell 50% to 70% of the business. There's a holdback, but you tend to lose control. Private equity takes control of the board. Basically, the owner has to stay around a year or two. A lot of people are starting to realize that private equity isn't the best thing because essentially what they're doing is using your cash flow to buy out your own business. The other situation called book value sale, and that's more professional service firms like accounting firms, law firms, and, engineering firms. A lot of them have what's called book value where if a partner retires, they get paid out their capital that was paid in. Right now, that's starting to get challenged, especially in the accounting profession where private equity has become more active in in the space. It's also engineering firms have done a lot of ESOPs. Some accounting firms have done ESOPs. Then the other opportunity is what's called the traditional ESOP. People always ask me, why aren't there more ESOPs? For the last twenty five years, it's kinda ranged between 6,007 ESOPs in the country. And I think it's kinda like that saying, you know, if you keep doing the same thing, you keep getting the same results. So we'll talk about your additional ESOP. And then there's the other type of ESOP, which we'll talk about today, which is the, Roth ESOP that gives targeted equity, but we'll talk about that later on in in this presentation. The the first thing, a lot of times I get working at a in a large accounting firm, I tend to get a lot of calls from business owners. And and I have to be honest, I tend to believe that if your earnings isn't 3,000,000 or more, it probably doesn't make sense to do an ESOP because of the transaction cost and because of the annual cost of doing it. But what happens is I'll get questions from a firm or or a business, and I'll just say to them, well, one, are you a taxpayer? And some businesses call me they're not a taxpayer. Or two, and they're not a taxpayer maybe because of accelerated depreciation or employment credits or or something like that. And then sometimes they they maybe have taxable income, but it's not quite 3,000,000. We'll recommend if they don't have a four zero one k to do a four zero one k with a profit sharing feature maybe. And then or we'll we'll suggest doing a defined benefit plan whereby, it could be skewed for the owners to you know the way IRS discrimination rules work, you could skew a defined benefit plan to benefit the owners if they're older and the workforce is younger. But, again, I'm not gonna go into a lot of detail here. But like I said, I think an ESOP makes the most sense if you have 3,000,000 of earnings or more. If it's less than 3,000,000, there's a lot of other things that you can do, to, one, bring up your EBITDA or earnings, and do some other retirement strategies that reduce taxation? David, I'll let you take it from here. Sure. Thanks, John. So I think, obviously, the first question is that we we have appeared in what is an ESOP? And and I'm sure many of you know, but we often hear it's an employee stock ownership plan. It's not an employee stock option plan. But so it's a qualified retirement plan, that's designed to invest in in company stock. So it's similar to a four zero one k plan, profit sharing plan that a company may have. But instead of having diversified investments in mutual funds that participants are able to select for their investment. It's a it's a it's a qualified retirement plan that allows you to this is designed to invest in employer securities or company stock, And it's not it's not there's no elective deferrals in any soft. It's it's employer it's employer, funded. So the company is funding this. So, typically, you're gonna just like any other retirement plan, you're gonna have a trust established. Company decides to put together an ESOP. You you create a trust, and the trust buys the shares of stock from the shareholders who want it, typically the selling shareholders. So, therefore, it's a liquidity event for the selling shareholders that, you know, puts cash in their pocket. As John was saying, it's a sale event. It's a true sale between the current owners of the company and the trustee who is established to buy the shares. And these shares are bought through a process, and it's all governed by ARISA, where you're gonna have a fair market value where the trustee is gonna go through a negotiation process with the selling shareholders where they're gonna agree upon a price. And under Arista, the idea is that the trustee gets an opinion from its financial adviser that the price being paid is not greater than fair market value. So we tend to see that this is a this is a real sale. It's a negotiated sale. Trustees do due diligence on the company, and you have to get your company ready to be sold. Once the ESOP owns shares of stock, it allocates the shares to the employees who are have a retirement account, which is cannot or is the value which is based on the company's stock. Once it's in a retirement plan, the account balances of participants will be increasing or decreasing as the value of the stock goes up. Now not a 100% of the stock is allocated on day one. Typically, there's a period of time that the shares are held in a suspense account, and they are allocated each year for employees based on a nondiscriminatory formula, which usually is about, which is usually, you know, based on some type of compensation similar to what's done in the internal revenue code for a profit sharing plan or or a qualified retirement plan. And as the value and and as the value of the company increases or decreases, the employees value those shares, it really does benefit the longer term employees because the longer you're there, hopefully, the stock price goes up, and you'll also be allocated additional shares for each year of service. David, I wanted to interject and ask you a question. So there's a question in the q and a section. So, is ESOP only for listed or public companies? That's a good question. An ESOP an ESOP can be and John spent much time. An eSAP is part of a of a retirement plan that can be, that can be, sponsored by both a public company, and that would typically be the stock fund that the public company has for its employees to choose as an investment. Or and and and and this our focus today is on private companies that are have private companies, companies that are not traded on it on any market, don't, you know, established market. And so this is really for our focus and the ESOP community, we look to private companies. And and it's traditionally middle market, you know, companies, and everybody has a different definition of middle market. But you're typically gonna see, you know, the low end, let's say, 20,000,000 of value. The high end, I I don't know, John. I I've I know that I know the largest ESOP, that I've worked on, you know, was about $600,000,000 in value. I know there are some billion dollar ESOPs. Those are typically really, super large ones are typically outliers, but I think the ESOP sweet spot for the for this type of liquidity event is a 60 to a 100,000,000 $150,000,000 company that's looking for liquidity. So it can be both, Himanshu, but we tend to focus here on private transactions. Perfect. Let's move to the next to the traditional ESOP. So so as John John mentioned in his earlier slide, it was, you know, traditional ESOP, and then he had a an ESOP that had a law ESOP. And it's really, like, it's a I think it's a little bit like playing Madden football. If you didn't play Madden you gotta know the basics before you can move forward. And the traditional ten forty two ESOP has been around probably since, you know, the the you know, when a risk brought in '27 in the nineteen eighties, it became popular. You know, congress had had has a long history of wanting to encourage ESOPs, and and and they like them for the, you know, continuity of business, providing employees retirement benefit. And, traditionally, the the the big sell on an ESOP was the tax advantage of what's known as section ten forty two of the Internal Revenue Code, which allows people to defer the gain or or the tax on the gain when they sell their stock to an ESOP. Similar to ten thirty one real estate exchanges where you take one type of property and exchange it for another, and you defer the gain on the disposition of the property. So, typically, in the traditional ESOP model was that people would be able to sell their company to an ESOP and be able to defer the capital gains on that sale as long as they went out and reinvested that the sale proceeds in what's called qualified replacement property. Qualified replacement properties defined under the internal revenue code, but you think of it as public the stocks and bonds in publicly traded well, in a trader business, mostly was thought to be publicly traded stocks and bonds. It wasn't you weren't allowed to do mutual funds. You weren't allowed to invest in real estate. So the idea is that you're continuing to have an investment in in in in equity. And so when you sell that equity in a second in the future, that's when you would recognize the gain from the earlier sale. And there's a lot of techniques that that the real standard technique in the industry that has developed over time is to buy certain type of floating rate notes that are issued primarily or only for the purpose of of having QRP or qualified replacement property out there. It allows people to reinvest their sale proceeds in a qualified replacement property. It's never gonna be so that you're not gonna wanna sell. You're gonna wanna hold it till you till you die, and then your heirs would get a step up in basis. So that's really the the the genesis of a ten forty two ESOP transaction. There are you know, these could be financed with banks. Banks the private bankers in who are here today, I can say. Banks typically, you know, like to finance ESOPs if the business is strong, and it really is a loan to the company and through this the the slides with the arrows. Everybody likes arrows. You know, the bank lends money to the company. The company lends it down to the ESOP. ESOP uses cash to buy the stock, and the shareholder replace buys the qualified replacement property. And then the employee's accounts, you know, grow with the shares that are allocated to their account. So yeah. I I I'll I'll just I'll just go through this because we're so we there there are certain criteria, and these are the highlights. I I think is I would say is you have to be a c corporation selling to the ESOP. So the ESOP has to be sponsored by a c corp. You have to be selling common stock with the greatest dividend and voting rights. You have to sell at least 30% of the shares to the ESOP or ESOP has to hold at least 30%. There is a three year holding period before before you sell your stock to the ESOP that you've had to, retain it. You can't get the stock as a as a comp you couldn't receive the stock as a compensation. You as the selling shareholder can't participate in the ESOP going forward, and there is this qualified replacement property that you have to buy to to manage that. So let let's jump into Did you talk about the Roth structure, which is, I think, the same you know, it still uses an ESOP, but it's just a different way of of of structuring the transaction. So so really when you you look at an ESOP, there's two types of companies in general. There's the c corporation where you have to be a c corporation to do the ten forty two, and then there's the s corporation whereby if an ESOP owns part of the business, that part of the business doesn't pay taxes at the federal level and almost every state recognizes at the state level. So if you're in New Jersey, that's a 50% tax rate, so that's a tremendous advantage. We've been doing e well, I basically, every Fortune 500 company has a Roth ESOP in place because they have a ESOP inside of four zero one k, and they let them do lots. For private companies, we've been doing it for about fifteen years. And basically, when you compare the Roth ESOP to a traditional ESOP, you have almost a 50% better benefit at retirement because if you're gonna get paid out and not pay taxes, that's a 50% better. But which is even better is when you do an ESOP at the beginning, is the company has a much lower value and it it's loaded up with debt. So if you were to do a Roth on it, at the back end, you're gonna have an incredible arbitrage. And in many cases, the Roth ESOP, what we found is that a Roth ESOP is probably 50% better economically for the owner workers and employees than a traditional ESOP. And then if you put it side by side to private equity, it's probably 80% better, and we'll we'll explain that as as we go on. And what's interesting is it's technically sound. There's you know, a lot of people like to say, well, it doesn't the law this is statutory. It's in the law. You know, if you you just took a look at the law, it's statutory. Hey, John. Can I just say can I just say one thing? So, one of the things that most is most amazing about about at least as my practice and I've spent time with it is you have Congress allows an, Congress has structured an s corp allowed s corporations. I I guess it was before 1998. You couldn't be an s corporation and have an ESOP. Congress decided that it was important to be able to expand ESOP opportunities to businesses that were small corporations, s corporations. And so they created a they they changed the law to allow an ESOP to be an eligible shareholder in an s corporation. And what that but what they what what they recognized was you know, the company will pay no tax, has no tax, and the shareholder is tax exempt. So what what that benefit was was they took away the benefit of section ten forty two. So if you sold your stock to ESOP that was an s corporation, you would have to you have to pay tax on the transaction. But going forward, the company is not taxed and the shareholders are not taxed. So if you have, you know, $5,000,000 of EBITDA in a flow through entity, you're typically gonna have 40% distributions that are gonna go to the government for the shareholders to pay their taxes. Now with your if you're an s corporation owned a 100% by an ESOP, there is no $2,000,000 distribution I mean, no $2,000,000 distribution to the shareholders to pay the tax. That $2,000,000 stays at the company stays inside the company. And therefore, when it stays inside the company, you get to do what you, you know, you as the business owner or the management gets not you're no longer the business owners, but management decides what they do with the money. And in one sense, because this is a leveraged transaction, you're not spending $2,000,000 on paying taxes. You could use that same $2,000,000 to reduce your debt. So even when I even without other benefits, which we'll talk about, and ESOP as a form of business operations is one that, you know, you may be no tax at the corporate level, no tax at the shareholder level, and you don't have to move, you know, you don't have to move your company to Ireland to get the benefits. Yeah. It's probably the best tax it's amazing when you look at the percentage of ESOPs in the country, how few there are and how unknowledgeable people are. For example, there's thousands of ESOPs that don't even have a Roth feature, which is it's insane. It's absolutely insane that that people aren't taking advantage of the statutory provision because who wouldn't wanna pay taxes on a dollar that when the payout is $10, you don't pay taxes? It's it's absolute absolutely mind boggling, the lack of sophistication in the marketplace around around ESOPs and North ESOPs. But the the thing about any Roth is you have to get the payout at the later of age 59 or five year. You have to have the money has to be in there at least five years. So we always for all our clients that we implement this for, we have them set up a Roth IRA so that when they retire, they just transfer, into a Roth IRA. And we've created not we created, but the law created hundreds and hundreds of employee millionaires using using the wrong structure. So maybe, David, do you wanna talk about the redemption strategy and how that works? So the one you and and and this is this is dense, John. I think this this this is sort of takes some of the the concepts of of of the original ESOP idea, selling to an ESOP. Looking at the history of, of the the guidance on the way ESOPs can be done and trying to create the opportunity for that low cost or low dollar value on a on a on a leveraged transaction. So what the way an ESOP Roth structure works for that we've set up is that the company will redeem the shares from the sell will redeem a significant 99% up to 99% of the shares owned by of the by the selling shareholder. That that's usually done with either bank financing or seller note of seller note or combination of the two. And and so there's we've put debt, you know, there's debt now on the company for the redemption note and for the seller I mean, the bank loan that finances it and or the seller note that finances it. And the selling shareholder is left with a, you know, small with the the number of shares that they're left with now represents a 100% of the equity outstanding because the redemption simply takes the shares and retires into treasury. So the second part is the simultaneous sale is the selling shareholder. We'll sell the shares to the ESOP for the difference, you know, the remaining value. So there's overall value of, let's just say, $4,060,000,000 dollars. $59,000,000 is paid to the selling shareholder through the redemption, and a million dollars is paid to the selling shareholder through the sale to the ESOP. Now the selling shareholder will pay tax on a million dollars that it receives, plus it'll pay tax it'll pay tax on the that on the repayment of the loan, which will have interest, obviously. So at this point, the ESOP now owns a 100,000,000 owns a 100% of of the company. It's a highly leveraged company. So the value of the shares that are that are held by the ESOP and that will get allocated to participants' accounts will have will have a really low dollar value as in any leveraged transaction. And that's the it shows the ability for the pew for participants to make to make wealth elections on the low, highly leveraged value similar to sort of what some of the more larger ESOPs in the in the space, you know, in the larger IRAs have taken advantage of, say, Mitt Romney and and and Peter Thiel. And so, really, we have the situation where the company redeems the stock, and the company will would is able to retain its s corp status. So we're never gonna have to be a c corporation. And then maybe I forgot to mention, if you do a ten forty two structure and you're an s corp and you convert to a c corporation to do it, you have to wait five years before you can reelect s corporation status. So, really, if if you're looking for the advantages of no tax, you know, operating in a tax free manner and being able to, you know, keep that in place with your ESOP and then make the Roth elections on low value, you're really pro you're really getting the returns or the projected returns that John was talking about on this structure versus a ten forty two structure, which has the advantage of tax tax deferral, but tax deferral versus the Roth allocations, you know, depending on how you structure this with the, with the selling shareholders and the employees, they're always gonna do better because congress has congress encourages Roths. They they've been, you know, you know, John, you prop you know, you could say Roths twenty years ago. People thought of them as an IRA. Now they're qualified plan contributions. So it's full sir full, you know, full extension of Roth to qualify retirement plans. So here's a basic chart that we we just to summarize, you know, the traditional ESOP, you have ten forty two deferral opportunities. The redemption ESOP does not. So in shareholders and family members can't participate in a traditional ESOP. Redemption, yes, they can. The target benefits to key employees using some of the same structures that we're testing for this for contributions and discrimination rules that apply to retirement plans, you're able to use the ESOP redemption structure to sort of look at your key workforce, the critical mass, and try to and you can allocate them shares that are disproportionate but still nondiscriminatory using the same rules that have been around for retirement plans since, you know, since the inception of Arista. The Roth is just creates a a further value to be able to take something out tax free. And one of the things on the bottom that we say is, you know, one of the things that sort of gives ESOP a little bit of heartache is there's this warrants and SARs which are meant to provide additional value to either selling shareholders who are lending into the transaction by taking the sever note or third party and SARs, which are like stock options for employees. They're traditionally in the ESOP transactions, the ten forty two. If you use the ESOP redemption structure, there's no need for warrants, no need for SARs, so there's no potential dilution to the ESOP. Everything is self contained within the ESOP. Yeah. And then, you know, it's interesting. Somebody asked the question on a Roth, you have to track the Roth and the non Roth. It's it's no different than a four zero one k plan where you do a Roth or pretax. So you'll have a subaccount that's in a Roth account, whether it's pretax or in a Roth. And like I said, you're always better off doing a Roth on a dollar when the payout is 10 or $20. You're you're it's a no brainer from a tax planning point of view. And, like I said, you know, it's economically, when you do the side by side and we're gonna walk through an illustration that you could see the power of of the Roth ESOP. It you could understand why it's 50% better than a traditional ESOP and probably 80% better than private equity while you still get to run and control the business. So let's move into this illustration here. We have an and we have a company where there's one owner, and I think this is where the Roth will make sense to a lot of people and the redemption will make a lot of sense. So we have a company. This is a real life situation. The company is an s corp right now. The business has a five multiple earning 10,000,000 a year, so there's no debt. And it's very common for private companies not to have a lot of debt on their balance sheet. We project that the company is gonna grow the next ten years at 5%. Yeah. We're gonna do it for redemption where where it's 99.9% of seller debt. In this case, we use seller debt, but you could use bank debt and seller debt. They're just changeable. And for illustration purposes, it's a lot easier to just show seller debt. The ESOP buy is at a 100,000, so you have a 40 a $50,000,000 company essentially being bought for a $100,000 net of debt. This is not like a, a crazy statistic example because if that is on enterprise, of course, it's the net value is the purchase price. And then in this example, we use a 7% interest rate to pay off, the selling shareholder. And and like I said, the ESOP buy is a a 100,000. And then the owner, in this example, with the the way the discrimination rules work, it's a combination of what's called four zero one eight four under the code and four zero nine p, which is the ESOP anti abuse rules that basically say you have to meet both nondiscrimination in the qualified plan and and meet the the anti abuse rule. In this case, an owner or owner's family can go as high as 49% in the ESOP. So here's the simplistic example. 10,000,000 earnings with five multiple. It's worth 50,000,000. The ESOP buy is a 100,000. The debt that's put on in the form of a redemption remember, redemption is, David said, is where the owner sells the stock to the company, and that basically makes all that stock, treasury stock. And then the only stock that's outstanding is the stock on the 100,000. If the owner, in this particular case, has a contribution of 49,000, which is 49%, They, the owner will then pay tax on that today, which would be about 20 if you're in New Jersey, a 50% rate, which would be about $24,000. And then the rest of the employees will own 51% of the company through the ESOP, and that could be done with what's called the leverage ESOP, so you don't have to give all that equity away upfront. What David talked about before is every company, you know, every company I talk to, they they feel that 20% of the people generate 80% of the opportunity. So a lot of times, they wanna give you could have a marketing person or a business operation person, and they may wanna give that person one or 2% of the company upfront, which you can do with with the structure, which you can't really do with the the traditional ESOP. So now we'll get into the illustration. And what this basically shows is that you the owner will have, in a $50,000,000 transaction, will basically get a 130, 2,000,000 of value over ten years on a $50,000,000 deal. There'll be about 17 and a half million of interest income to the owner with the 7% seller debt. The principal payment will be capital gains treated, and that's the 49,900,000.0 in this column. And that's treated at capital gains in New Jersey. That's 20% federal, about 10% New Jersey. If you go all the way to the right, you the value of the ESOP with a five just a 5% growth rate. And this example is worth a 131,000,000 in ten years, and the owner's interest in that at 49% of the family in this example is worth 64,000,000. So could you imagine having 64,000,000 in a Roth account that builds up in ten years? That's a life changer. But if you're an employee, think about getting 1% of this in a $131,000,000 company, that's $1,300,000 That's why we have so many employee millionaires in our world of PSOs because a lot of employees can get up to 1% or half a percent in this type, and the wealth creation is phenomenal in a very, short amount of time. And then the third column from, I guess, the right just shows the, value to the the owner over time, and then all the way to the right just shows the increase in value of the ESOP over a ten year horizon. And and and this when you look at this, this is really great for owners that are 50 age 50 or older that have wanna stay in the business from, say, three to ten years. And it could be excellent for a business we've done management buyouts using this structure where the owner has gotten more value than doing private equity. So in a private equity deal, if you have a $50,000,000 company, it's typical to have a 30% to 50% holdback. So if it's a 50% holdback, then you're getting cashed out of 50% of the company. In this case, if the value is 50,000,000, they'll get 25,000,000. And then if you're lucky, the, you know, the company will get sold to a third party down the road, may hopefully, at a higher value, you'll get your other 50%. With the Roth ESOP structure, you're selling a 100% and you're getting monetized on a 100%, and you're, you're also participating in the ESOP, which could give you another payout event when the company ultimately gets sold. We have a lot of family businesses doing this. If they have members of the family that they they're not certain that they can run the business where they they could maybe, run the business. But if they can't, then the business gets sold to a third party. We use this strategy as a succession plan for many private companies so that they can develop the management team to sell the company. Hey, Don. Can I say something? Can I can you if you go back to that slide can you go back to that slide? Sure. One of the things about ESOPs and the and and for the right business owner is for the companies is you would never, you know, business owner could sell their business and get $50,000,000 or they could sell their business to a private equity firm. And I would say I would say, what would the employees get? They would get nothing. So this strategy, while the example shows, you know, this growth in rate, I we've we've been involved in clients over the years who've done this strategy. And one of the things they're most thrilled about is how well their employees do. Like and and and and you could just look at the strategy of being able to provide your employees as well. I mean, selling your $50,000,000 business to private equity or even doing a leverage recap on your $50,000,000 business and growing it back up in value and and then and then selling the business, you could do that. But the idea behind being able to create a liquidity event, stay engaged, do really well financially, and also be able to provide for your employees, I I think that there's many business owners who look at, you know, who look at their employees as part of as the reason that they've been able to grow this business. And so quite frankly, you know, while it's a great example of wealth creation for the business owners, I like to say it's a you know, they're accessing their value and they're creating wealth going forward when they do this transaction. And the wealth that they're creating going forward is for themselves and their families, but for all of their employees also. So it's just a a great opportunity and a what something that I while maybe not, you know, depending on the business owner, the the the the middle market business folks out there, you know, is the the the the people who had worked on this business for only for thirty, forty years looking for a a a liquidity event that they that they're comfortable with. This is a really good option. And and I like to call it an option because business owners should be able to look at all of the things that, you know, the opportunities. Compare this to a private equity sale. Compare it to a a traditional ESOP sell and compare it to a ESOP with a Roth. Look at the projected earnings, see which one you projected revenue or projected proceeds, see which one you like as far as the value, and then you can decide. And you're not selling anybody short if you do the CSOP. So it it is a very, powerful tool, and and and I think that, you you know, the companies that we've all worked at, you know, John, PKF OConnor Davies, that I worked on and other companies that have done this or I haven't had a, you know, somebody regret. And it really does work out nicely in the right situation. Yeah. We we haven't had one bad ESOP, which is, I have to say, is more luck than smart. And we've also had hundreds and hundreds of employee million it's not just the owners. They're already millionaires. Yeah. And the management teams are probably doing 10 times better with the Roth ESOP than they're doing with the traditional ESOP because it'll let SARs and warrants, they're not they're not as valuable than than doing it inside the ESOP. There's a couple of questions that are really good questions. So with the Roth ESOP, you're selling a 100% to the company to the ESOP, and then the owner and employees are participating in the in the ESOP. And what's called a disqualified person or family can own up to 49. So, yes, you're selling a 100% and it's your your it's almost like a a reinvestment, but that's a reward that's given to you through the ESOP. If you're employ you have employee somebody asked another question. If employees are outside The US, well, you you can only have to cover you can only cover US employees, so foreign employees are covered. If they have US source income and they're they're part of US business, they could be covered. But if they're foreign employees, we just did an ESOP where there was a thousand employees, only 50 were in The US and the rest were overseas. The 50 in The US got all the value of the ESOP, and we had to come up with another structure, like a profit sharing type structure for the foreign employees. There was also a question here about somebody age 85. I just did a transaction two years ago for a business where the owner was 84, and he looked at the ten forty two versus the Northeast top and realized that the Northeast top is really good for him for two reasons. One, because of the the explosive the value that grows inside the East types so quickly. But more importantly, he had a son in the business, and this was a way to minimize estate tax because you can put if if your if children are inside the company, they could be part of the ESOP. And if it's a family, the children here get the full 49%. Now you get out of income and estate tax. So it's a very powerful tool, and it it could be adjusted to the situation. With that, we gotta make sure Himanshu has plenty of time to talk about valuation because valuation is everybody's first question. What does my company work? So I'll let Himanshu take it from there. Thanks, John. So I I'll take the valuation slides, but, I think there are couple other interesting questions. So, John, if you don't mind taking those. So there is a question asking, does ESOP work if a business owner want to retire in three to five years instead of ten years? Yes. The answer is definitely yes. It's just what I like to tell people is you're gonna get better economics if the debt is all paid off before you exit. But, yes, we've had a lot of situations where the business was sold or the owner retired in three to five years, and and the economics was absolutely phenomenal. David could talk about a situation that we did where the ESOP is only in place five years. And, Dave, I don't know if you wanna talk about that real quick with the industry. So five years I think it I think it also may answer another question to match you. You know, the ESOP was was was done pre COVID, and the business owner was thinking he would stick around. You know, he was in his early fifties, was was willing was was looking forward to working. He got they got a really, really, really great offer, that it you know, really high you know, really it is a a great premium over to over the most recent ESOP price, you know, five years later. And when when he was asked, why do you wanna sell now? He said, I'm in construction. I saw what happened in 2008. If if that happens again, my values go down, I'd my guys would be crushed, and he thought it was a great opportunity for the guys that he worked, you know, all of the 70 employees who shared in a a real large amount, a real a great a great premium price. You know? And and so, yeah, he sold the business. They sold the sub trustee, you know, went through the process. You know, we've had other companies that, you know, have have had owners who thought they were gonna stick around for ten years, but their seller note got paid for most their seller note got paid off early, and their ESOP account, they were comp they they they left the company, and they got paid out over time on their ESOP benefit, and they're real happy. So, yeah, it's a a nice way to actually set if you set if the business gets sold in the future, it's an even bigger home loan. Yeah. We we try to tell people that this is a retirement plan and they're treated that way. But in the construction company, the owner mentioned that he'll well, he was glad to see all his owner all his employees bought $70,000 pickup trucks in the apartment. But but but, John, and I think that the one thing that we do wanna say, you know, the the ESOP concept and you hear is is a retirement plan. Well, it's in whether it's in place for for three years, five years, or thirty years, it creates retirement benefits that all of the employees could buy a pickup truck, or they could move it into an IRA, a Roth IRA with their with their their proceeds, and it continues to provide them with retirement benefits. So when you're when you're providing a benefit to, you know, people who are who may otherwise have difficulty or maybe economically, you know, you know, in a construction industry, people aren't, you know, unfortunately, aren't able to maybe put money into their four zero one k in an early age at a young age and have it accumulate. If you if you're in a situation, the the the amount you receive is still a retirement benefit. So I don't think it's really any any any different than if somebody leaves and takes a retirement benefit. This this the the value continues to be there to provide retirement benefits, and this is just a, you know, a nice a nice supplement for people who may not have otherwise been able to accumulate such large balances. So let's do it, Amantu, do his valuation because I think we, you know, we wanna make sure we get through everything. So go ahead, Amantu. Yeah. Thanks, John. So I'll jump into valuation now. We still have a few questions to take, but we can take it at the end. So as John rightly said, when you are selling your business, the first question that comes up is what's the valuation of my business? And as we mentioned, the the ESOP plans are really by partition. Congress has been pushing the ESOP plans for for a long time. And, the Republicans love it. The Democrats love it because not only these, ESOP plans provide a great retirement benefit for the employees, but also a nice exit for the business owners. So when it comes to valuation, one thing that needs to be kept in mind is its fair market value. So when you compare it to a private equity or a strategic buyer, we can compete with private equity all day in and out because private equity pays the business owner's fair market value, and that's the same premise of value that ESOPs use. Now comparing it to the strategic buyers, yes, strategic buyers can pay a higher multiple. However, just to make a direct comparison, what I would say is if an ESOP pays the business owners, let's say, five to seven times multiple, to make it truly comparable with the strategic sale, the strategic buyer should pay you at least eight to 10 times multiple. And the reason is there are so much, there is so much tax efficiency. You are saving a lot of money in taxes with an ESOP. So that's why even with a slightly lower multiple, the strategic buyer has to pay a much higher multiple to make it equal. So now going into the valuation approaches, there are two main approaches that, you can see here, income approach and market approach. So the income approach basically relies on interest intrinsic valuation techniques, such as discounted cash flow and capitalized earnings, which estimate enterprise value based on projected or normalized cash flows discounted at a rate reflecting the company's risk profile. Now the market approach benchmarks the subject company against comparable public companies or precedent m and a transactions, applying valuation multiples to derive a relative value. So these methods are foundational in ease of feasibility analysis and fairness opinions, ensuring valuations are both defensible and aligned with fiduciary standards. Other than these two approaches, there is a third approach, which is cost approach, and we seldom use that because that approach is used in very unique situations. Moving on to the next slide. So this slide explains how we estimate the value of a business based on the ability to generate cash flows. So the discounted cash flow method looks at future cash flows and adjusts them for risk to get today's value. The capitalized cash flow method uses past performance to estimate value, applying a formula that accounts for expected growth. So these two approaches help us understand what the business is really worth, especially when you are planning an ESOP transaction. So two different methods, but both sit under the income approach. So capitalized cash flow method, I would say, is more applicable when the business is not able to do long term projections, and DCF is will is reliable on the projections. And, if your projections are not good, the DCF is not going to result in a accurate value. So the next slide so this slide, highlights the strengths and limitations of using the income approach to value a business. No doubt, it's a powerful method because it considers all key financial assumptions and allows for detailed customized analysis, especially useful in mergers and acquisitions. However, as you can see, it has challenges as well. It requires many assumptions. As I said, garbage in, garbage out, and, that can introduce uncertainty. And then small changes in these assumptions can significantly impact the valuation. So while it's, thorough, it's also complex and sensitive to input quality. Going on to the next slide, so this slide explains the market approach to business valuation, which compares the company the subject company to others in the same industry. So there are two main methods here, the guideline comp public company method, which uses valuation multiples from similarly publicly traded companies, and then there is guideline transaction method, which looks at a recent sale of comparable private companies. So these approaches help estimate value based on real world market data, making them useful for benchmarking and understanding how investors and buyers might view your business. So this slide, essentially, outlines the pros and cons of using the market approach to value a business. On the plus side, it reflects current market sentiment, uses publicly available data, allows for easy benchmarking against similar companies, and it's especially useful when recent m and a activity provides relevant comparable transactions. However, as everything else, it has limitations. So finding truly comparable companies can be difficult. Private company data often needs adjustments, and older transactions may not reflect today's market. So while it's, practical and, grounded in real world data, it's not always a perfect fit for every business. And we could tell you if if you're interested in exploring an ESOP or a third party sale, we can talk to you about your business, give you an idea of what the range of value is so that you can make a a prudent decision as to, you know, does it make sense to I always tell my clients, I use the word stupid money. You know, for example, if your house is worth a half a million dollars and somebody offers a million and a half, I say you leave the keys on the island. Right? So same thing with a company. If everybody has a good sense of what the company's worth, but, you know, you wanna do a deep dive to look at it and and figure out what what's the best approach for you with your business. Because a lot of times when I talk to business owners, the the business is their child or, that they you know, and it's very important we and we take it very seriously in making sure they make the right decision, and it's designed the right way to maximize wealth, not just for the owner, but the management team and the employees. So here's a chart on, you know, who the players are. David can, I guess, talk you wanna talk to this David as to Sure? Sure. So so, you know, I think that I I like to say that there's a team approach with your ESOP because unlike a a sale of a business to a third party that comes in and gives you an offer, an ESOP situation is you're going to present an offer to the trustee for the valuation. So you're gonna come in. You wanna be prepared to to have an idea of what you think the value is going to be. Well, you have a value. I'm sorry. You have a a value an idea of the value of your business. And what we would do is there's a company has a sell side adviser, ESOP consultant, helps come in or company financial adviser comes in and helps figure out with you looking at your past, you know, financial state, your your most recent, well, three years of financials, looks at projections, looks at the business, and helps develop with inputs. You you know, obviously, a lot of input from the company on a range of values that that we would anticipate an ESOP transaction would happen. And I'm gonna ask Amantu the question in in just a moment. But if this is all sort of getting the company ready to do the transaction, ESOP consultant would come in and would try to show you, like, John PKF O'Connor. Davis would come in and be able to do a feasibility we love the word feasibility analysis. And how's this ESOP gonna look when it's in place? How much is the what's the operations of the business? And I like to say, once you put an ESOP in place, this becomes your capital structure. So what's it gonna look like? How are we designing this ESOP transaction? And what's the value? This is all done before you decide to even go forward well, before the ESOP, offers being made. So you have a financial consultant, an ESOP feasibility consultant with the design, and then we lawyers always get involved in something. So, Manchu, it the old rumor I people he says, oh, you'll never get paid. You'll You'll never get the right value in ESOP. How do you respond to that thought or that pressure? You don't laugh, but I yeah. We could all laugh, but go ahead. Yeah. No. I as I mentioned that, it's the fair market value premise. And, as I discussed the evaluation method, so these are very traditional methods, market approach and income approach. And, we go through a very rigorous process when we do the feasibility analysis. So it's not like you come to us, and I will say, okay. Your valuation is somewhere between five to seven times. I mean, I have to look at a lot of different factors, what what industry your business is in, what are what are the compete competitors you are competing against, what kind of margins you are making against the competitors. So there are so many factors that go into the valuation, and our feasibility study relies on the fair market value premise, which is similar to a private equity sale. And as I mentioned before, to make it comparable to a strategic sale, strategic buyer has to pay you a much higher multiple than a ESOP. So do you get a right value within ESOP? Absolutely all the time if you hire the right adviser. And, what I would add on the feasibility analysis is, we spend a lot of time with all the business owners when we do the feasibility analysis because it's a big decision. And, the company wants to understand what kind of risk they are taking when they are doing an ESOP transaction. And sometimes company give us projections. They say, okay. I project the company is going to grow by three to 5% each year for the next ten years. But then when they are close to making a decision, they they say, okay. What happens if my business drops? It it goes negative 2% for next five years. So we are happy to run all those scenarios and show you what your Roth balance is going to look like in five years with those set of projections. But, obviously, these these are projections, and nobody can, project it accurately. When I was when I was working at my previous firm, my, colleague used to say this, that the only thing that you can say about your projection is going to be wrong. Well, that's that gives us a lot of confidence. But after you've gotten the company ready, the other the so the company has its team that gets this gets everybody gets everything in place. The ESOP is a separate you know, has a qualified retirement plan governed by Arista. There's a trustee who will be actually signing the dotted line on the purchase agreement and saying that they're gonna buy the shares whether, you know, through the funding whether the note or however they're gonna fund it. The ESOP trustee has a financial adviser who's gonna give them an opinion that this price paid is not greater than fair market value, and then the ESOP trustee is gonna have their own lawyer who's gonna, you know, help with the negotiate assist in all process all the parts of it for the trustees to fulfill their obligation of of, you know, acting as a fiduciary under ERISA. Finally, the shareholders, you know, they're gonna have a financial adviser because this is also a really good time to look at your wealth planning, you know, the the strategies. Their accountant who's gonna ask lots of questions to John about what does this all mean, and then they they can have also their own legal counsel if, you know, to review transaction documents, for themselves. So it is a it is a there's a team approach, and I would say one of the most important things that the team approach brings is the ability to execute. Because as as Amantu said, we, John and I, and Amantu, we all recognize that these are milestone events. John, what did you say? It's like selling their it's like their their child. Yeah. You know what it is? It's their their life. Their whole life work is their business, so they wanna make sure they're doing the right thing. Some people are very concerned about the employees. Some people are concerned about value. We try to balance both, you know, giving value and benefiting the workers and the owner and and and the management team. What's interesting is it it does sound, like, really complex, but, you know, when I talk to people, 99% of the time, I could tell in twenty to thirty minutes whether an ESOP makes sense or doesn't make sense with a phone call. You don't need to hire somebody to do a lot of work. It's just really a couple of questions around earnings. What does your balance sheet look like? What are your goals? It's not that people tend to make it more complex than what it really is, but it could be a simple exercise. And and this is a slide of post closing and what it what it ESOP looks like and who the what's going on. So, Dave, you wanna just talk at a high level? Sure. Yeah. So, David, can you can you just quickly take this slide? Because I have a few very interesting questions that I want to take. So go ahead. Take this slide. This is an easy an easy slide. The the question really becomes is post ESOP, how does the business run? The trustee owns the shares, but the company is not run by the trustee. The company has to be run by the people who know how to run the business, the board of directors, the management team. They have a little bit more governance. It's nice to actually bring some governance, principles in, but the company runs the same as it did before because the trustee doesn't know how to run your plastics injection molding business, and they want you to be successful. So we have a you know, we try we spend a lot of time going through that. Manju, why don't you get to the questions because we could we'll go this. So Yeah. Yeah. So let let me answer a couple of these here, and then I'll, get John and David to answer a few. So okay. One question is, could this work for a small escort with one employee? Unfortunately, not. And David can speak to that in elaboration. But the thing is, ESOPs are a broad based plan, and, these are governed by ARISA. So the whole reason these plans are put in place to benefit employees and, obviously, help owners get a nice exit. So it doesn't really work with one employee. We need about 15 to 20 employees to put a plan in pay place. And, in terms of the profitability, I think John mentioned before, we need somewhere between, well, I would just give the lower threshold. We need at least two point five to three million dollars in EBITDA to put a plan in place because there are administrative expenses associated with the plan, and there is a transaction fees. So you want to put a plan in place which is affordable. David, anything you want to add? I would just say unless you're as Esop folklore, only Jerry Seinfeld tried to have one person, Esop. I don't know if it's true, but that's when four zero nine p came in after he ran all his business there. So that's my contribution. Okay. David, you want to take this one as well? So what happens reasons why many of our or many selling shareholders could go to a bank to finance. They look to think of themselves as if they're to a seller note for the financing, they think of themselves as a friendlier lender, and they hopefully can you know if the business goes has its ups and downs, they could defer their payments. We typically structure the loans, the internal loans with the the loan from a redemption note if they do it. Ten year note, interest only, prepayment, no prepayment principle, and a balloon at the end. So gives you enough flexibility. We definitely try to create flexibility for people. I mean, obviously, if there's any downturn in the business that's that's permanent, you you'd wanna work it work it out and try to you know, just like any other situation, the business is gonna try to manage its debt. I I would say that the ESOP that we worked on, I and and John says we've had, you know, no bad ESOPs, but we have had ESOPs that industries change. I mean, an ESOP we did ten years ago was in the book publishing business. Who would have known that, you know, the and and, you know, bookstores were selling their books all over the place. Who would have thought that the, you know well, the Internet kind of took away all their books. So, I mean, that happened. So really not ESOP related, but definitely change in industries or change in change in outlook. Yeah. If there's a change in the business, obviously, you wanna try to figure out how to do the soft landing. And we've had clients that have had rough times, and we've just helped try to help them manage, through the through the process. So, you know, the cost of setting up an ESOP, if it's done the right way with the right players, it's probably in a million dollar range for all the play and and higher depending on the size of business. Some people will tell you it's 2 or 300,000, but they're just selling you snake oil. They're not there's no way when you hit all the professionals. It's it's probably a million, and I would I would bank on between 100 and a 150 a year in in fees going forward. And and you know what? It doesn't pay to mislead people and say, you know, oh, it's only gonna cost you this. But it it the reality is when you have lawyer all kinds of professionals putting something like to put it in place and to design really design the ESOP for the critical workforce, It has to be done the right way, and that million doesn't go to one player. That million goes to, like, six people. You know, you have yeah. As as as you have you have the trustee, you have the trustee advisory team lawyer, financial advisor, you have the lawyer for the sell side, you have the ESOP consultant, which is PKF OConnor Davies, and and financial advisor, which is PKF OConnor Davies. And then, obviously, the client has their own. You know, they might be their accountant, their own lawyer. So as you could see, we have a lot of professionals involved, so it adds up. But if you were to sell your business, a $50,000,000 business, investment bankers typically charge two to 5%. So you could do the math on that. So, you know, it ESOPs are are are a lot less expensive than the third party sale in general, but they're still not a cheap if you're selling your business and all the processes of selling a business have to be in place, and you have to do it the right way. So, again, I I think, you know, there's no sense misleading people. It's not a cheap transaction. But at the end of the day, what are your objectives? And get your objectives done. And if every box gets checked, it makes sense. Right? I haven't had a client come back and say I'm unhappy because of the fees. They're they're nobody likes to pay a lot of fees. Right? But at the end of the day, if you're getting value, the fees shouldn't make I mean, they do make it different. It's not a cheap transaction. John, I can I can take the next one? Join the evaluation process, who's responsible for pushing back on the projections? I would say that it's it's it the projections are the responsibility of the company. And that's one of the first things the trustee is gonna ask for. And while, you know, they're gonna look at the projections as your good faith belief that they're going to be that this is attainable. And they're not in their auditing your projections or they're just gonna they might have wanna know how they were done and the reasonableness of it. So it's not so much a, it's not that they're coming in and doing a Q and A or or or doing a separate analysis of your projections. But if you've only if you had two percent growth for the last five years and suddenly you're projecting 10% growth, you're gonna you're gonna pay for it's gonna be reflected in the future value. Yeah. So I I just want to add one thing, David. So so if you are working with a sell side adviser like us, so I mean, it's our responsibility to evaluate the projections in detail and question everything that you provided us before we take it to the market and present it to the ESOP trustee. So we need to have a very diligent discussion before we sign off on the transact we sign off on the projections, use as a company, sign off all the projections, and we take it to the trustee to present it. I'm Alright. So John John, the question of if you start with the traditional, can you convert to a rough Yeah. Rough? Great question. Yeah. We we've got a couple of those going on right now. The only thing is the traditional let let's just say your ESOP company is now worth $30,000,000. Well, you know, to con it may if if you think your company is gonna be worth 50,000,000 in four years or five years, yes, you can convert. The other thing with a traditional ESOP is if your loan payment is less than the value that's getting released every year, you you should definitely do the work on the so let's just say your loan payment is a $100,000 on an ESOP loan, but the value that's getting allocated is worth 300,000. Who wouldn't wanna pay tax on a 100,000 and get value worth 300,000? So we're talking to a lot of traditional unfortunately, I hate to say this, but a lot of advisers in the ESOP space aren't familiar how to do with ESOP because and people tend to sell what they know. Right? So they tend to sell what makes them the most money as opposed to what gives the greatest value. But we've done we're working on a lot of traditional ESOPs trying to convert them. We also have the concept of if you're a traditional ESOP, we call it ESOP two, where we buy out the current ESOP with a new ESOP that's the Roth structure. And, you know, it's a it's a complicated transaction, but it's almost like selling to a third party. So, yes, and every situation is different. I have a call at 03:00 today with a company that they have a traditional ESOP and their loan payment, it it it's, the the value release is a third greater than the loan payment. It's almost like a no brainer to convert to the wrong. But you can add you can add the wrong feature to a traditional ESOP to provide your employees the benefit of being able to make that election, as John said, on a low contribution levels. The contribution from the employer differs from the value of the shares allocated to their account, so you could take advantage of that. And then for the mature ESOP that, you know, it's gotten that it it's been in place for ten years, fifteen years, has no shares left to allocate or maybe relatively few that wants to stay in ESOP can go through the process of terminating ESOP, providing everybody with real value through the through the through the distribution and then put a new ESOP in place with the RAS structure. Yeah. And it it's obviously more expensive with a traditional ESOP because if you had an ESOP account with worth a million that and you're in a 50% tax bracket, even if the value is gonna go to 3,000,000 in, say, five or ten years, that's a hard pill to swallow to pay half a million in taxes today. It's the smart financial answer, but it's not an easy who's got a half a million sitting around to to pay? So that's why, you know, doing the ESOP and the raw, doing it from day one is probably the most economical, and it does make sense with a traditional. It's just a little more complicated. And, sadly, it's a lot more it's all about the service provider. Right? They they didn't even talk to you about the bot. So how could Right. You know, you really you never had that opportunity. So to convert after you do the ESOP is an expensive proposition. Right. David, one more very interesting question here. So let's say you do the ESOP Roth transaction and later, you want to sell to a strategic buyer. Is that possible at all? Oh, yeah. I I think I think we we touched on that earlier, Himanshu. The easy the quick answer that I always tell my clients who are either ESOP client that was getting an offer or if we're rep if I'm representing, I get called in for one of our other clients who's buying a company with an ESOP. I always say it's just another shareholder. You can do whatever you whatever we need. I think that when it's the sell there's always complications. But when I think the sell I think companies are really, you know, I have not we've seen a lot of ESOP companies that have been bought as, as add ons in a private equity platform structure. So now it it's it's possible the decision to sell the company is a is a is a board decision. And, you know, so the board of directors who can can who are typically going to be, you know, people who are at least you know, if you have a five person board, three of them can be insiders and two of them independent, they make the decision on whether or not the company's even for sale. And then the trustee will will come along so long as the price paid by the buyer is greater than fair market value at the of the ESOP's most you know, not less than fair market value where there's a premium to the ESOP value. Happens all the time. Happens all the time. Yep. Okay. About a lot of the pros. There are some cons. Right? So, you know, there is complexity. Somebody at the company needs to understand the rules. You can't just do an ESOP and not have somebody at the company educated on how an ESOP works. So the biggest problem we find with clients is, you know, the owner wants to get the ESOP set in for all the great value, but somebody at the company has to oversee it, and there's usually an ESOP committee that should be set up. You have the the good news about an ESOP is it creates a lot of wealth. The bad news about an ESOP is it creates a lot of wealth. So you have to manage, you know, the payment of that value comes out of the cash flow of the business. So that's a negative there, and and that's called the repurchase obligation. And then there's an ongoing administrative cost, but no different than if you had a pension plan or your four zero one k. We tend to like to merge the four zero one k with the ESOP only because it it reduces cost and it's more efficient. You have one plan, one audit if it's more than a 100 participants. And and the banks have become more sophisticated in ESOPs. Where the old days, certain banks couldn't do ESOPs because they didn't understand them, and they didn't understand the accounting rules. When you first do the ESOP, you're gonna have to navigate a stockholders' equity because of the debt on on the balance sheet. So, again, there there are some negatives, but they're manageable. It's not every there's there's pros and cons of everything. Right? So you have to weigh the two together. Hey, John. So David already addressed the question on the sale to a strategic buyer after you do this ESOP Roth. There is an example in terms of valuation that you always give to the clients or prospects, and what are the advantages of being in a Roth when you sell to a strategic buyer in a few years. Can you talk about that quickly? Sure. So let's just say the ESOP value is is 50,000,000, but a strategic wants to pay 75,000,000. Well, when that happens, all the debt gets paid off on the sale, and the difference just goes straight to the roof for the workers and the owner. So there's an incredible premium that happens. And, you know, we don't the life cycle of most ESOPs are probably ten to fifteen years. And what happens is a lot of times the owner sells, then what happens is the management team kinda takes over. And and and when they're ready to retire, a lot of times, that's when the company gets sold because maybe they don't have a succession plan. Right? Or like I we said before, stupid money rings the doorbell. It's like the house analogy. The house is worth a half a million. Somebody offers you a million and a half. Listen. You gotta go with a million and a half unless there's sentimental value in in in not selling. And then this slide just shows all the different industries. It's almost every industry has has an ESOP. And, Himanshu, I don't know if you wanna talk to this a little further. Sure. So yeah. I mean, what you can see here is ESOP is really, industry agnostic. You can do, ESOP for a lot of sectors. I mean, there are few factors that, go in that favor. So number one is stable and predictable cash flows. So industries like manufacturing, professional services, and construction, they often have more consistent earnings, making it easier to support ease of financing structures. Then I would say number two is strong employee engagement. So sectors where employees are closely tied to operational success, such as services, construction, So they tend to benefit more from the ownership culture, ESOPs, or more. And then lastly, I would say succession planning needs. So privately held businesses in the industries like manufacturing, health care often face, succession challenges. So you have ESOP, which can structure a exit strategy for the owners while preserving company legacy and independence. So, you know, we we are at our time limit now. I think we've tried to answer every question that's in the queue. I don't think we missed anything in there. There are couple of them, but but it should be pretty quick if you want to take them. Yeah. So I'll let Cindy make that decision whether we end now or answer those last questions. I think we need to wrap it up. Okay. That makes sense. If you have asked a question, please know that one of our professionals here will answer it for you through the emails we have, already garnered. So, we truly appreciate. My goodness. What a great interactive presentation. Truly enjoyed it, gentlemen. And, Harlene, I don't know if you'd like to finish up with any closing remarks that that you need to have. And I would just wanna thank you so much from the Center for Private Business Owners of PKF OConnor Davies, and please know that we will have another webinar on November 20 that will involve selling the business. So look forward to seeing you there as well. Thank you. Thank you, gentlemen. Harlene, closing remarks. Thank you, Cindy. And thank you so much for our speakers, and thank you everyone for attending today's session. If you have not completed it already, we have launched our survey located in the survey tab of your panel. Just a friendly reminder, a copy of the PowerPoint slides and a recording of today's webinar will be made available to all attendees via email four business days post event. CPE certificates will be issued within eight to ten days via email. Thank you again, and have a great rest of your day. Thank you, everyone. Thank you, guys. Thank you.