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The Employee Ownership Update

Corey Rosen

July 14, 2009

(Corey Rosen)

India, Australia Ease Path for Employee Ownership Plans

India's government has announced that it will eliminate the fringe benefit tax (FBT) on equity awards retroactive to April 1, 2009. Under a 2007 rule change, the FBT (34%) was imposed on the gain realized from the exercise of stock options, stock purchase plans, or other equity plans by employees. Employers could pass the tax on to employees. That widely unpopular rule has now been changed back so that employees are subject to the tax at capital gains rates for qualified plans and ordinary income tax rates for non-qualified plans.

The Australian government has also backed away from its proposed changes to the taxation of options and restricted stock units. The new rules would have considered the grant of the award a taxable event except for certain broad-based plans meeting both qualification provisions and containing a genuine risk of forfeiture. That proposal received considerable opposition. Now the government is proposing that all awards be taxed at exercise, provided there is a genuine risk of forfeiture. Companies would still have a reporting event on grant, however. Details on the proposal can be found at this link.

Median Sale Price for Businesses Down 27% in 2008

Business Valuation Resources in Portland, Oregon, estimates that the median sale price of a closely held company fell from $551,000 to $400,000 in 2008. Presumably, it is down even farther now. Median net sales fell from $1.03 million to $804,000. In the first quarter of 2009, midmarket transactions were 25% less than a year ago, according to Dealogic.

These data are contained in the sixth annual Inc. valuation guide. The guide provides a useful—if very imperfect—rough guide to estimating how much your business is worth. The guide is in the June 2009 issue of the magazine, as well as on Inc.'s Web site.

Don't Pay a Percentage of a Transaction to Set Up an ESOP

Recently, I got a call from a financial advisor. His client was thinking of setting up an ESOP as a business transition tool for a $15 million company. The client had been approached by a New York investment banking company that quoted them a fee of three percent of the transaction. I had never heard of the firm. They told him they knew $450,000 was a lot of money, but the tax savings would more than justify it (in California, the tax savings could be a deferral of $3.75 million, so depending on assumptions about future tax rates and when the reinvested securities would be sold, this could be true). The advisor was uneasy with this proposal and said he would get the company to join so they could get the straight story on setting up an ESOP and referrals to legitimate ESOP experts.

If you are thinking about an ESOP, do not pay a percentage of the transaction on the sale to set up a plan. No legitimate ESOP attorney charges such a fee, and, for a company this size, $450,000 is many times what is probably needed to set up a plan. In a few complex cases, companies may need investment banking services to help raise financing, in which case a percentage of the financing can be charged, but the very large majority of ESOPs do not need this kind of service.

Ownership Thinking Meeting in Denver September 17 and 18

The NCEO is cosponsoring a meeting on "Ownership Thinking" put on by NCEO board member Brad Hams in Denver. The meeting focuses on incentive plans, open-book management, and employee engagement. NCEO members Jenny Briggs from New Belgium Brewery and Ken Ritterspach from Stylmark are among the featured speakers. For details and to register, go to www.ownershipthinking.com.

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