BACKGROUND

• Pet food component manufacturer
• Business consists of 3 LLCs
• 2 main owners in early 50’s
• 3 locations with hundreds of employees
• Very low basis
• Large relative AAA attributable to main owners

GOAL

• Main owners want to retain control
• Owners want partial liquidity to invest in other opportunities
• Reward long-term employees
• Access business value with lowest tax impact as possible

SOLUTION

• Payout legacy AAA with 5 year note
• Form C Corporation holding company, roll 2 of the 3 LLCs into new HC
• Sell 98% of HC stock to new HC ESOP(each owner retains 1%)
• Borrow total of $26,700,000 from bank
  • − $22,700,000 Senior Debt at floating rate
  • − $4,000,000 Revolver at floating rate
• Seller finance $35,000,000 as subordinated 20 yr. note payable at 4.5%(effective mezz. rate of 15%)
  • − Warrants issued for NPV of difference in rates (actual vs owed) exercisable when debt is extinguished
  • − Warrants will recapture value equal to approx. 40% of company value
• Convert to S Corp immediately after sale of HC stock to ESOP

BENEFIT TO CLIENT

• Combined, owners receive $50,000,000cash from sale to ESOP
  • Immediate cash from ESOP -$15,000,000
  • Notes totaling $35,000,000 plus interest over 20 years
• Combined, owners receive AAA payouts totaling $9,500,000 over 5 years
• Sellers receive additional $20,000,000 in cash when warrants are exercised
• Estimated owners’ combined capital gains tax savings $10,000,000
• Estimated corporate tax savings$39,000,000 over next 10 years
• Employees share $50,000,000 plus growth of corporate value at no cost to them
• Owners retain control and diversify assets