General Inquiries

Warrants and SARS in an ESOP

  • 1.  Warrants and SARS in an ESOP

    Posted 08-13-2019 12:48

    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.

    Ron Jacobson CCIFP
    Boudreau Pipeline Corporation
    Corona CA
    (951) 493-6780

  • 2.  RE: Warrants and SARS in an ESOP

    Posted 08-14-2019 09:36

    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




  • 3.  RE: Warrants and SARS in an ESOP

    Posted 08-14-2019 11:33
    Our company became an ESOP in 2015.  We have both Warrants for the former owners and Management Incentive Plan (MIP) shares.  Our owners were in their 40's when they sold 100% of the company.  We negotiated the number with our trustee and the Warrants and MIP shares are part of our valuation.  Our former owners are engaged and the key leaders have golden handcuffs.  The only "mistake" we made was to issue all the MIP at once versus holding some back for up and coming key employees.

    Dawn Stephens, CPA
    Charter Construction, Inc.

    Dawn Stephens
    Chief Financial Officer
    Charter Construction, Inc.
    Seattle WA
    (206) 382-1900

  • 4.  RE: Warrants and SARS in an ESOP

    Posted 08-14-2019 18:13
    Edited by Michael Zermeño 08-14-2019 18:19
    We have worked with about fifteen ESOP clients through their transactions with a few different transaction teams in the past two to three years and most have included warrants and SARs. Warrants provide the selling shareholder(s) a market rate of return on their notes with less current cash flow from the company. This helps share the financing burden and gives them a second bite at the apple. The warrants are also a great estate tax planning tool.

    SARs are typically only included in 100% transactions as they are dilutive to any partial shareholders. One of the key ingredients to a successful and sustainable ESOP is the successor management team. SARs provide the key members of management responsible for the overall growth and value of the organization with an incentive that is aligned with their responsibility. It also adds some mid-term compensation to their compensation structure, their ESOP accounts being long-term and any bonuses being additional short-term compensation. For members of management that do not contribution to the overall growth and value of the company, e.g. a division manager, a bonus structure based on their specific metrics may be more appropriate. To Dawn's point, you do want to be very selective and strategic about who is granted SARs. There are ways to structure the MIP to ensure future availability.

    Warrants and SARs certainly add some additional complexities. However any organization considering a leveraged ESOP should be of the appropriate size and sophistication. It is important to note the complexities should fall more on the professionals involved than on the companies.

    Michael Zermeño, CPA
    Roorda, Piquet & Bessee, Inc
    Riverside CA
    (951) 684-7781