1. 1 Grow Your Financial Services Practice with ESOPs  For financial professional use only. Not for distribution to the public.

2. 2 Employee Stock Ownership Plan (ESOP) repurchase liability funding Financing nonqualified plans Funding buy \ sell agreements Personal needs of the owners and key people; bonus plans; split dollar Estate planning for owners and key people Lender requirements Potential for multiple life insurance sales For financial professional use only. Not for distribution to the public.

3. 3 A business valuation of at least $3 million Eligible payroll of at least $750,000 to $1 million C corporation or S corporation status at the time of the ESOP transaction (required) Solid financials and profit history to secure bank financing Capable successor management ESOP candidates generally have: ESOP company profile For financial professional use only. Not for distribution to the public.

4. 4 78 million Baby Boomers are experiencing, approaching and entering retirement* More than half (53%) of Baby Boomer business owners intend to exit in the next ten years and about 86% will sell to a non-family member.** * Source: U.S. Bureau of the Census, July 2008 ** Source: 2008 Survey America's Entrepreneurialist Generation: Exit Planning and the Baby-Boomer Age Wave Overview For financial professional use only. Not for distribution to the public.

5. 5 “Pent up demand” - business owners considering retirement have been “sitting on the fence” due to recent economic conditions Taxes have gone up - capital gains taxes (20% federal + state + medicare tax = 30%+ in some states)* You can help business owners by learning more about ESOPs Immediate opportunity For 2014, federal long term gain minimum of 10% with a cap of 20% with a Medicare contribution tax of 3.8%. State rates will vary. For financial professional use only. Not for distribution to the public.

6. 6 Business owner solutions based approach Market need for employee stock ownership plans (ESOPs) Case example – sales opportunities How do they work? How do they benefit the client? Who’s a prospect for an ESOP? What do you do if you have a prospect? Agenda For financial professional use only. Not for distribution to the public.

7. 7 Business Owner & Executive Solutions For financial professional use only. Not for distribution to the public.

8. 8 6 risk management & planning questions 1. Survivor income How would your survivors fare if you were no longer around to run your company? What would they do for income? 2. Income protection If you were to become disabled, how would you protect your income for you and your family? For financial professional use only. Not for distribution to the public.

9. 9 6 risk management & planning questions cont’d. 3. Business protection What steps have you taken to protect your business against the death or disability of one of your key employees? How can you avoid losing them to a key competitor? For financial professional use only. Not for distribution to the public.

10. 10 4. Retirement income What percentage of your retirement plan is funded with your business? How will you convert your business equity into cash or retirement income? 6 risk management & planning questions cont’d. For financial professional use only. Not for distribution to the public.

11. 11 5. Exit planningWill you be able to control the ownership transition of your company while you’re alive and healthy? Or, will your business become part of your estate? 6. Wealth transfer How can you minimize estate taxes and expenses and maximize the net proceeds of your estate to your heirs? 6 risk management & planning questions cont’d. For financial professional use only. Not for distribution to the public.

12. 12 Exit planning - ESOP value proposition Sell some or all of a company to a ready, willing and able buyer At fair market value Avoid paying capital gain tax Secure financing on a pre-tax basis If I could show you a way to… Would your client be interested? For financial professional use only. Not for distribution to the public.

13. 13 What is an ESOP? Employee stock ownership plan is an employee benefit plan that allows… Shareholder(s) of closely held corporation to sell their stock at fair market value to a “friendly buyer” with tax advantages Employees of the corporation share in company’s profitability through stock ownership For financial professional use only. Not for distribution to the public.

14. 14 An ESOP is a “qualified” benefit plan (based on ERISA) Contributions are deductible as an “employee benefit expense” (within limits) Plan assets are held in trust for the exclusive benefit of participants Earnings on assets in the trust don’t generate current taxes What is an ESOP? For financial professional use only. Not for distribution to the public.

15. 15 All eligible employees must participate (no discrimination) Vesting schedules apply Sound familiar? What is an ESOP? For financial professional use only. Not for distribution to the public.

16. 16 What is an ESOP? 1.An ESOP holds primarily one security –Employer stock 2.An ESOP can use the company’s credit to borrow money to buy stock from a shareholder Two important differences from other qualified employee benefit plans: For financial professional use only. Not for distribution to the public.

17. 17 1.Cash from the sponsoring corporation 2.Loan Where Does the ESOP Get the Cash Necessary to Buy the Stock? For financial professional use only. Not for distribution to the public.

18. 18 Two types of ESOPs: 1.Non-leveraged The company contributes stock to the ESOP The company contributes cash to the ESOP (can buy stock later) 2.Leveraged What is an ESOP? For financial professional use only. Not for distribution to the public.

19. 19 ESOP External Loan LENDER Internal Loan COMPANY The leveraged ESOP transaction Step 1: The loan For financial professional use only. Not for distribution to the public.

20. 20 Repayment of External Loan (3) The leveraged ESOP transaction Step 2: The repayment LENDER COMPANY ESOP Tax-Deductible Contributions (1) Repayment of Internal Loan (2) For financial professional use only. Not for distribution to the public.

21. 21 A company in the 40% tax bracket must earn $1,667,000 to repay $1 million of principal* An ESOP saves $667,000 in pre-tax earnings because principal is tax deductible * $1,667,000 x (1 -.40) = $1,000,000 Powerful leverage For financial professional use only. Not for distribution to the public.

22. 22 Corporate governance in privately held companies: –The trustee is the owner of the stock, not the participants –Employees own stock after receiving a distribution Control For financial professional use only. Not for distribution to the public.

23. 23 –The trustee is the owner of the stock, not the participants –The ESOP trustee votes the shares* –The ESOP trustee can be directed how to vote –Participants are beneficial shareholders but do not have direct shareholder rights –The ESOP is a “passive shareholder” * “Pass-through” vote to employees in the event of merger or liquidation Control For financial professional use only. Not for distribution to the public.

24. 24 –Must be C Corp status at the time of the transaction –ESOP must own 30% immediately after the transaction –3 year holding period prior to the transaction –Must reinvest proceeds into Qualified Replacement Property (QRP) within 12 months after the transaction “Tax-Free Rollover” – IRC 1042 For financial professional use only. Not for distribution to the public.

25. 25 Tax savings creates a source of premium $5 million of stock sold to an ESOP $1.25 million of tax savings (assumes a zero cost basis and 25% state and\or federal tax savings) “Tax-Free Rollover” – IRC 1042 For financial professional use only. Not for distribution to the public.

26. 26 There is no tax (corporate or personal) on that portion of S corporation income allocable to shares owned by an ESOP Tax is due at distribution (and can be rolled over to an IRA or other qualified plan) Special issues for S corporation For financial professional use only. Not for distribution to the public.

27. 27 S Corp shareholders cannot elect capital gains tax deferral under IRC 1042 Solution: Convert to C Corp status prior to implementing an ESOP (consult tax advisor first Special issues for S corporation For financial professional use only. Not for distribution to the public.

28. 28 1.Retire 2.Terminate Employment 3.Become Disabled 4.Die 5.Diversification –25% at age 55 and after 10 years of participation –After six more years up to 50% How do the employees get stock out of the plan or allocate to other investment options? For financial professional use only. Not for distribution to the public.

29. 29 What is the repurchase liability? A long term corporate employee benefit obligation Participants hold a “put option” requiring the corporation to buy back their vested stock account balances at fair market value; IRC 409(h) Off balance sheet liability / obligation For financial professional use only. Not for distribution to the public.

30. 30 2007 Sales Stampede Repurchase liability management What are plan sponsors managing? Conflict between cash flow required to repurchase shares and cash flow required to operate and grow the business What are the goals? Strike a balance Mitigate risks For financial professional use only. Not for distribution to the public.

31. 31 2007 Sales Stampede Repurchase liability management Step 1 Forecast ESOP repurchase liability Run multiple scenarios to determine range of possible outcomes –Change the assumptions –Establish “most likely” scenarios –Update annually For financial professional use only. Not for distribution to the public.

32. 32 2007 Sales Stampede Repurchase liability management Evaluate funding alternatives “Pay as you go” from working capital/earnings Pre-fund obligation (inside the ESOP / on the balance sheet) Tap unused debt capacity Create a market (internal / 3 rd party sale / IPO) For financial professional use only. Not for distribution to the public.

33. 33 Options to pre-fund the liability Make excess cash contributions to the ESOP Create a taxable sinking fund outside the ESOP Create an insured, tax-deferred sinking fund outside the ESOP with life insurance Some combination of the above For financial professional use only. Not for distribution to the public.

34. 34 Why life insurance? Tax free earnings growth of cash values in permanent life insurance products Tax free death benefit of life insurance proceeds Tax free access to cash (withdrawals \ loans) Tax free switching among the mutual funds within a variable universal life policy For financial professional use only. Not for distribution to the public.

35. 35 Provides key-person coverage Insures against premature deaths of largest ESOP account holders No surrender charges (COLI) Liquid asset on the balance sheet to offset the liability High early year cash value which can exceed premiums paid after the 1 st year Why life insurance? For financial professional use only. Not for distribution to the public.

36. 36 ESOP repurchase SARS, phantom stock, deferred comp. SERP, other nonqualified plans Commitments to non-ESOP shareholders Multiple corporate liabilities For financial professional use only. Not for distribution to the public.

37. 37 120 employees $20 million business value S Corp - $3 million in net income 2 owners (50% - 50%) 10 additional key people Had explored all alternatives Sales Opportunities ESOP Example*: Successful international marketing firm * Not indicative of future results. Results will vary based on retirement plan characteristics. For financial professional use only. Not for distribution to the public.

38. 38 Female in her early 50’s Actively involved –Making a big impact Retirement in 5-10 years Male in his early 60’s Semi-retired Ready to exit About the owners For financial professional use only. Not for distribution to the public.

39. 39 ESOP bought his 50% interest for $10 million (fair market value) ESOP borrowed $10 million (bank financing) Corporation made cash contributions to ESOP equal to principal and interest payment to pay off debt Results For financial professional use only. Not for distribution to the public.

40. 40 Income formerly distributed to retiring shareholder available to help pay off debt Saved $4 million in taxes due to deductible principal payments Remaining owner controls the company Benefits to corporation and remaining owner For financial professional use only. Not for distribution to the public.

41. 41 Received $10 million in cash equal to the fair market value of his liquid, private stock Saved approximately $2 million in capital gains taxes (via IRC-1042 corporation converted to C Corp) After 3 years of exploring alternatives, finally retired Benefits To Selling Shareholder For financial professional use only. Not for distribution to the public.

42. 42 $10 million of stock allocated to employee ESOP accounts that cost them $0 Job security –Ownership succession plan accomplished Benefits to employees For financial professional use only. Not for distribution to the public.

43. 43 $10 million of life coverage on each shareholder (key person/debt coverage) $8 million in 401(k) takeover $400K of annual COLI premium to fund liabilities of ESOP and new nonqualified plan for key executives $10 million asset management account Benefits to Financial Professional For financial professional use only. Not for distribution to the public.

44. 44 Why are ESOPs good for your practice? ESOPs create liquidity Increased liquidity creates opportunities for asset management, risk management and estate planning solutions For financial professional use only. Not for distribution to the public.

45. 45 Business Succession Needs Executive Benefits NQDC Executive Benefits NQDC COLI Repurchase Liability Asset M anage m ent Estate Planning Charitable Gifting Strategies Financial Planning Qualified Plans ESOP Multiple Sales Opportunities For financial professional use only. Not for distribution to the public.

46. 46 What makes an ESOP unique? Sell a majority interest in your company and still maintain control No “price haggling” – the price is fair market value or less Avoid paying capital gain tax at time of the transaction Purchase a shareholder’s equity interest with pre-tax dollars An ESOP enables you to: For financial professional use only. Not for distribution to the public.

47. 47 What makes an ESOP unique? The timing and number of shares sold to the ESOP The day to day operations of the company during the transition process, even after the ESOP owns a majority of the shares The business owner and/or other non-ESOP shareholders control: For financial professional use only. Not for distribution to the public.

48. 48 Contingency plans “Plan A” –Exit plan implemented while you’re alive and healthy “Plan B” –Exit plan upon death or disability For financial professional use only. Not for distribution to the public.

49. 49 Contact Geoff PeConga –Peconga.Geoffrey@Principal.com –888-393-8025 ext. 4013 Or contact a member of the Advanced Solutions team at 515-246-2424 How to pre-qualify a prospect For financial professional use only. Not for distribution to the public.

50. 50 Feasibility Analysis Seller Investment/Planning Legal Documents Financing Valuation Administration Employee Communication Building blocks of an ESOP transaction Comprehensive Analysis Preliminary strategy based on plan sponsor specifics What we do For financial professional use only. Not for distribution to the public.

51. 51 Required Data: Completed feasibility questionnaire (PQ5801-01) Most recent 3 years of financials –Balance sheet and income statement) Employee census ESOP Preliminary Review For financial professional use only. Not for distribution to the public.

52. 52 Why the Principal Financial Group? ESOP Leadership #1 Recordkeeper of ESOPs 1 900+ Plans 2 Over 1/3 (40%) of NCEO 100 3 1 Based on the number of plans, PLANSPONSOR Recordkeeping Survey, June 2013. 2 As of December 31, 2013. 3 The Employee Ownership 100, National Center for Employee Ownership (NCEO), September 2013. For financial professional use only. Not for distribution to the public.

53. 53 Retirement & Investment Leadership #1 Recordkeeper of Defined Benefit Plans 1 Leading Provider of Nonqualified Deferred Compensation plans 2 Leading Provider of Defined Contribution plans 3 1 Based on number of DB plans, PLANSPONSOR DB Administration Survey, April 2013. 2 Based on total number of NQDC plans, PLANSPONSOR Deferred Compensation Buyer’s Guide, December 2013. 3 Based on number of recordkeeping plans, PLANSPONSOR Recordkeeping Survey, June 2013. Why the Principal Financial Group? For financial professional use only. Not for distribution to the public.

54. 54 While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that The Principal is not rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements. No part of this presentation may be reproduced or used in any form or by any means, electronic or mechanical, including photocopying or recording, or by any information storage and retrieval system, without prior written permission from the Principal Financial Group ®. Insurance issued by Principal National Life Insurance Co. (except in NY) and Principal Life Insurance Co. Plan administrative services are provided by Principal Life. Securities are offered through Princor Financial Services Corporation, 1-800-247-1737, Member SIPC and/or independent broker dealers. Principal National, Principal Life and Princor® are members of the Principal Financial Group® (The Principal®), Des Moines, IA 50392. For producer information only. Not for use in sales situations. Copyright ©2014 Principal Financial Services, Inc. BB10315-02 | 03/2014 | #t14030403xk