How To Exit Your Business In Style

Donald S. Feldman CExP™, CPA, CVA, ABV, MBA

Keystone Business Transitions, LLC

Presented by:

don@keystonebt.com www.keystonebt.com

http://www.linkedin.com/pub/donald-feldman/23/5a0/607/

May 1, 2014

–Like retirement planning for business owners

Major asset is complex, illiquid business;

Must understand business owner’s goals, personal financial situation, strengths & weaknesses of business, exit alternatives;

Culminates in written report detailing how business owner can accomplish his or her goals.

What is Succession/Exit Planning?

Typical Goals:• Achieve financial security for

retirement. • Preserve your business legacy. • Preserve the jobs of your employees.• Pass wealth to your family.• Establish a significant charitable legacy.• Preserve family harmony.

Why Plan?To Accomplish your Goals

Succession Planning Transactions are Risky Business.

• 65% - 75% of business owners want to transfer their business to a family member or key employee – only about ½ of these succeed. (PwC 2007)

• 80% of businesses with < $50MM in revenue that go to market, don’t sell. 65% of businesses with > $50MM in revenue don’t sell. (Wells Fargo 2012)

• No comparable statistics for management buy-outs or family succession, but high rates of failure for these as well.

To Avoid Failure

Lots of business succession transactions fail – big part of the reason is lack of planning.

Why Plan?

Elements of a PlanIdentify Objectives – When to exit? To whom to transfer business? Transfer wealth to children? Charitable objectives?Quantify Resources – Liquid assets + value of business – enough to support you during retirement? Maximize and Protect Business Value – Review business operations, motivate and retain key employees. Plan for increasing business value?

Ownership Transfer to Third Parties – Is the business saleable? Can the business survive due diligence? Tax planning. orOwnership Transfer to Insiders – Plan to avoid high tax cost; leadership transition planning.Business Continuity – Plan for business to survive the death or disability of owner.

Personal Wealth and Estate Planning – Integrate business plan with estate plan.

What Prevents Owners From Taking Action

23%

14%

12%10%

10%

31%OTHER

I don't feel a sense of urgency about this issue.

While I feel some urgency, other issues require my attention.

When I'm ready to exit, I'll take the nec-essary actions.

I'm too busy.

I need to stay in my business until I have enough money saved to retire.

Source: BEI’s North American Business Owner Survey, 2014

1. Sale to a Third Party2. Sale to Insiders – Family, Key Employees, Co-owners3. Sale to an ESOP – Employee Stock Ownership Plan4. Liquidation5. Recapitalization6. Dying With Your Boots On

Exit Alternatives

Formation Phase

OrganizingAcquiringFinancing

Transition Phase

Business Growth and Development Phase

GrowthManagement Structure

Financing

Choose Appropriate SuccessorsManagement Structure

FinancingCash Out

RetirementPassive Business OwnershipNew Ventures - Business and

Non-Business

1 - 3 years 10 - 40 years 3 - 5 years

Post-Business Phase

Business Owners’ Timeline

Business Owner’s Timeline

• Must understand the value of the business– Business value must be transferable – if dependent on the efforts of the owner, not worth

much to someone else.• Motivate and keep key employees

– build management team and groom successor(s).• Improve financial performance. • Plan to reduce income taxes upon sale of business.• Protect assets from potential business and personal

creditors – use separate entities.• Plan to survive buyer due diligence.

• Intangible assets – trade names, licenses• Inventory valuation• Good business systems & financial controls in place• Understand how legal rights can be transferred – distribution agreements, leases & contracts

Getting the Business Ready

Getting the Owner Ready • Is Owner emotionally ready to get out?o What is life after the sale going to look like?

• Does the owner have the right team of advisors in place?o Not for do-it-yourselfers

• Is the Owner financially ready to sell?• Retirement plan• Financial plan• Estate plan• Shareholders agreement

Choosing a Successor

Must understand the consequencesfinancialbusiness operationsfamilyemployeesyour legacy

The First Critical Decision

Owners’ Choice of Successor

41%

29%

24%

6%

Key Employee(s), Co-Owner, ESOP

Third Party

Child/Children

Other

Source: BEI’s North American Business Owner Survey, 2011

Choosing a Successor – Sale to Insider

• Usually insiders don’t have any cash• If financed by seller, greatly increases seller’s risk• Usually can only obtain bank financing after

buyer has run business for several years as minority owner.

• Usually insiders can run the business• Poorly understood problem –

Employees don’t always want to be owners.• Potentially very high tax cost.• Typical payout over 3 – 7 years.

Ownership Transfer to Insiders

Problem for Insider Transfers:

• Insiders rarely have the cash to buy the business outright.• Usually, most of the cash for insider sale comes from the business.

• Classic example is installment sale: Inside buyer purchases stock for a note, uses cash flow from the business to make note payments.

• This will result in double taxation without proper planning

Ownership Transfer to Insiders

Minimize two levels of tax:

Deferred compensation to selling owner – pay portion of company value out as ordinary income;

Use valuation discounts to dramatically reduce value of minority stock interest – sell e.g. 30% over three years then use bank loan to finance remaining stock. Pay seller deferred comp.

Alternatives to Installment Sale

Other strategies using qualified retirement plans – cash to owners with minimum tax:• Cross Tested profit sharing plan• Defined benefit plan• ESOPo Partial sale to ESOP, partial sale to key employeeso Key benefit of S corp ESOP sales:

“Deductible” note payments on leveraged ESOP Interest owned by ESOP not subject to income tax.

Ownership Transfer to Insiders

Ownership Transfer to Insiders

• Other highly tax efficient techniques:o Stock bonus

Frequently used to transfer initial ownership to insider – corporate deduction, income to recipient.

Can also use qualified / non-qualified options.

o Defined Benefit Qualified Plan Owner’s buy-out can be partly in this

form in the right circumstances

• Can junior run the business?• Should kids not in the business have ownership?• If two or more children in the business, can they cooperate

after the senior generation is out of the picture?• Are dad and/or mom pressuring the kids to stay in the

business?• Twin dangers: family considerations interfere with the

business, and business considerations ruin the family.

Choosing a Successor – Family Members

Key advantages:– Significant % of cash at closing

(usually some seller financing or earn-out).– No family/employee succession issues. – Ability to sell and business value are determined by:o Intrinsic Value: projected future cash flow.o Extrinsic Value: the value the market places on the business depends on

market cycles.– Effectiveness of the sale process

(use of transaction intermediary)– Speed of exit.

Choosing a Successor – Sales to an Outsider

• Is business positioned to be sold to an outsider?o Need sustainable, transferable cash flow.o Can business withstand buyer due diligence? o Is there a management team in place that will stay with the company

after transfer of ownership?

• Who are likely buyers – larger competitors? Suppliers/customers? Private equity groups? Private investor?

• Value of the business will be different to different types of buyers.

• Must have realistic understanding of valueo Obtained from valuation, SWOT analysis, realistic growth/business plan.

Sales to an Outsider (cont)

• A written Exit Plan based on your objectives.

• An experienced team of advisors to design and implement the plan.

• Cash flow and a quantified business value.

• A strong management team in place.

• Time.

Ingredients of a Successful Exit

Characteristics of Exit Planning Team

• Experience

• Owner selects Team Members

• Critical Specialties (will depend onparticular circumstances):o Valuationo Legalo Accountingo Financial Planningo Qualified & Non-Qualified Plan designo Transaction Intermediary

Why Use Keystone Business Transitions?

• Objective – We don’t take commissions. No financial incentives for one exit route rather than another.

• Experience – We’ve guided more than fifty business owners through the process.

• Our greatest satisfaction is to see you through a successful transition.

Donald S. Feldman, CExP™, CPA, CVA, ABV, MBA

Keystone Business Transitions, LLC901 Rohrerstown Road

Lancaster, PA 17601717-435-9671

don@keystonebt.com

Thank You for Your Participation