We're finalizing the setup of our ESOP and I was hoping some of you might be able to give me some feedback on your thoughts/usage of Warrants and SARS. We currently have competing views from a couple of our consultants regarding them. One is proposing the utilization of Warrants as a means of providing the Seller with incentives to stay involved and for its potential tax advantages. Another is arguing their overly complicated and there's better alternatives than Warrants. They also have mixed thoughts on Performance SARS for especially the Management Team. Have any of you utilized Warrants or SARS? Why or why not? How did it work? Tax implications? Any insight would be appreciated. Thanks everyone.
Our company became 100% owned ESOP 20 years ago. At the same time we switched from a C corp to an S corp. The two owners at the time wanted to sell 100% because they didn't want to deal with the issue of having to take a distribution to cover their tax liability if they maintained partial ownership. One of the owners retired immediately. The second owner continued to work in the company as the President, until last year. Today, he works reduced hours, and reduced salary.
The incentives for the second owner to stay involved were a salary and bonus, shares in his ESOP account, and the realization that if he simply walked away and the company faltered he would be the biggest loser. Over time we developed the transition plan that will let him retire completely at a relatively young age. We could have developed and implemented that plan much earlier, but he was interested in continuing to work, and we were very interested in continuing to have him as President and the face of the company.
We've looked at alternative compensation methods for the outgoing President and the new hire. We ultimately concluded cash is the best way. He has a salary that's tied to the work he does, and he has a bonus that's tied to how well the company does. On top of that, he maintains shares in the company through the ESOP.
Timothy J. Mickunas, CPA, CCIFP
Chief Financial Officer
Office: (956) 686-9573
Address: P.O. Box 3455, McAllen, TX 78502-3455
An Employee-Owned Company
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