Small Business Succession Planning The CHRISTMAN Group LLC

Our Goals: Make this a fun and informative day for you. Teach you how to begin to include exit planning in your practice. As a result: Questions are encouraged!

Small Business Exit Plans: What Are They, Who Needs Them, and Why

What Is An Exit Plan?
An exit plan is a comprehensive road map to successfully exit a privately held business.
It asks and answers all of the
business,
personal,
financial,
legal and
tax questions
involved in selling a privately owned business .

What Is An Exit Plan? Investment Banking Estate Financial Tax Legal Exit Plan

Why is This Important?
Huge Need = Huge Opportunity
Huge Opportunity = Huge Responsibility

Why is This Important?
Demographics – The Age Wave
Baby boomer generation - more entrepreneurial than any other generation in history
7,700,000 business owners will need exit planning services in the next 15 yrs.
These businesses represent $10 trillion in market value

Let’s look at some of The Risks of Not Having an Exit Plan

Owners are Reactive, not Proactive
Most business owners exit their companies as a result of pressure from outside factors, not as a result of their own desires

Owners Have Poor Timing
The exit their companies on a timetable that’s forced on them instead of one that meets their needs

Owners Leave Money on the Table
They undervalue their companies and leave hard-earned wealth on the table

Owners Pay Uncle Sam
They pay too much in taxes because they don’t know the have options

Owners Lose Control
They lose control over the process by being reactive and limiting their exit options

Owners Fail to Achieve Goals
They fail to realize all of their business and personal goals

Owners Create Unnecessary Stress
They suffer unnecessary psychological stress

Owners Put Business at Risk
Owner’s are the primary reason that confidentiality is breached during the sale or exit process

Owners Put Legacy at Risk
They risk watching a lifetime of work disintegrate as a result of poor business continuity planning

The Benefits to Business Owners of Exit Planning
Achieve business and personal goals
Empowerment and control
Business preservation
Preserve family harmony
Reduce employee and family uncertainty
Increase proceeds in owner’s pocket

The Sad Reality
Fewer than 25% of business owners have anything close to an exit plan
70% of business owners report that they did not accomplish their goals in exiting their business
Very few advisors are asking the right questions

Exit Planning Advisors a multi-disciplinary approach
Attorney
Financial advisor
CPA/tax specialist
Insurance professional, and
Investment banker
Investment Banking Estate Financial Tax Legal Exit Plan

Attorneys
Raise the exit planning question
Meet with owner regarding exit planning objectives
Help form advisory team
Help prepare formal exit plan
Conduct pre-transaction due diligence
Prepare client’s estate plan
Prepare tax minimization strategy with accountants
Handle M&A legal work

Accountants
Provide owner and other advisors with information regarding historical and projected financial performance
Prepare audited financial statements for client if warranted
Analyze owner's business goals and assumptions
Develop a tax minimization strategy with attorneys

Financial / Insurance Advisors
Help business owners understand the importance of financial planning prior to selling
Perform a financial needs analysis
Develop recommendations regarding investment strategy that is aligned with the owner’s exit plan
Implement strategic wealth management plan after the sale.

Investment Bankers
Value business
Make value enhancement recommendations
Provide quantitative financial analysis for decision making
Prepare offering materials
Conduct marketing program to attract buyers
Negotiate letter of intent
Coordinate due diligence and documentation process

Identifying Clients in Need of Exit Plans
Owns a middle market business
Is age 40 or older

Section II: Setting Goals and Identifying Risks

Setting Goals
Personal
Family
Financial
Business
Legacy
Community/Philanthropic

Evaluating Goals
Specific
Realistic
Measurable
Lifestyle-based
Consistent
Honest
Compatible
Agreed to

Understanding Risk and Risk Tolerance
Leaving the business on their timetable
Creating financially security for themselves and their family
Who should get the business?
Loss of confidentiality

Common Objections
Not sure how to start
Difficulty discussing personal matters and goals
No time to focus on long-term planning
Believe the time is not right to start
Intimidated by the process
Afraid of life without the business
Concerned about confidentiality

Conflicting Value Systems Family Value System Ownership Value System Management Value System This is where exit planning needs to take place. Classic Interference Patterns Affect Exit Planning

Understanding Transition Satisfaction
Personal Identity
Marital Status
Financial Resources
Involuntary vs. Voluntary Transition
Contact with Others
Having a Plan

Timing is Everything 3.6 years or more Total Time 6 months – 1 year 4. Prepare exit plan 1 year or more 3. Implement value enhancement and tax planning 1 year 2. Investment banking/sales process 1 year or more 1. Transition process Min. Period Step

The Exit Planning Process
Five Steps
1. Personal Financial Plan
2. Business Valuation
3. Maximizing or Protecting Value
4. Maximizing Proceeds
5. Investment Banking Process

The Personal Financial Plan
1. Current Spending
2. Future Lifestyle
3. Major Future Capital Expenditures
4. Current Asset Base
5. Required Asset Base
6. Wealth Management Strategy

Business Valuation
1. When is a Valuation Needed?
2. What Type of Valuation is Necessary?
3. Definition of Value
Fair Market Value
Investment Value
Liquidation Value

Purpose and Its Impact on Value $10,250,000 Investment Value or Market Value Buyer, Seller and their advisors Controlled Auction Third-Party Buyer $9,000,000 Investment Value or Fair Market Value Co-owners Buy-Sell Agreement Co-owners $6,500,000 Fair Market Value with discounts IRS Gifts/GRAT Family Resulting Value Value Standard Valuation Authority Exit Option Exit Channel

Section IV - Building, Maintaining or Minimizing the Value of the Business

Three Keys to Maximizing Value
Fundamental Value Drivers
Protecting Existing Value
Investment Banking Process
Investment Banking Process Focus on Value Drivers Protect Existing Value

Fundamental Value Drivers
Good management team
Solid operating systems
Operating profit margins above industry average
Solid, diversified customer base
Realistic growth strategy
Effective financial controls
Good and improving cash flow

Value Enhancement Plans
Importance of Goals
Balance Impact vs. Relevance
Resource Commitment
Accountability

Maximizing Value The Importance of Goals
Action plans must be structured to deliver the most “bang for the buck” within the relevant time period.
This requires prioritizing goals and making difficult trade offs.

Maximizing Value Balance Impact vs. Relevance Low Relevance High Low Value, High Relevance Low Value, Low Relevance High Value, High Relevance High Value, Low Relevance High Value Low

Maximizing Value: Resource Commitment
Handle In-house or Outsource?
Personnel?
Funding?
Appropriate expertise?
Bandwidth?
Accountability?

Maximizing Value: Accountability
Launch meeting
Assign specific tasks to specific people
Set mileposts
Set deadlines
Monitor regularly
Assign one “coach or quarterback”

Protecting Existing Value
Retaining Key Employees
Protecting Trade Secrets
Pre-Transaction Due Diligence

Protecting Existing Value: Retaining Key Employees
Sales and profits
Potential exposure of trade secrets and loss of employees to competitors
Plans for expansion
Operations
Morale/loyalty of other employees
Mentoring of successor managers
Customer relations

Retention Programs for Key Employees Current Yes Stock Bonuses No Yes Dividends Current No Qualified Fringe Benefits Current Deferred Qualified Deferred Deferred Deferred Nonqualified Deferred Current Yes Salaries & Bonuses Employer Tax Deduction Employee Taxable Income Employee Compensation

More Sophisticated Retention Programs
Restricted Stock
Phantom Stock
Incentive-Based Compensation

Protecting Trade Secrets - Employment Agreements
Necessary
Protect confidential trade secrets
Prohibit solicitation of
Clients/customers
Employees
Non-compete
Right to Work
In Terrorem

Protecting Existing Value: Pre-Transaction Due Diligence
Review and address:
corporate housekeeping
title to assets
approvals and consents
major contracts
environmental issues
employment policies
litigation

Section VI - Ethical Issues

Fees
Fees should be reasonable taking into account
Time and effort required
Custom vs. “off-the-shelf” solution
Results
Time limitations
Experience required
Whether fixed or contingent

Confidentiality
No disclosure of client information, unless needed to
Prevent client from committing a crime
Establish a claim or defense against the client

Conflicts of Interest
No conflict with other clients
Transactions with client prohibited, unless
Terms are fair and reasonable
Fully disclosed in writing
Client has ability to consult independent counsel
Client consents in writing

Section VII – The Costs/Benefits of Exit Planning: Case Study

Case Study: The ROI of Exit Planning
Introducing exit planning into your practice requires an understanding of the value you could deliver to your clients.

Roger Before
Roger owned a successful medical equipment rental business.
Status: tried unsuccessfully to sell his company for 12 months
Goals: maximize the value of this company
Estimated value: $6 million
No personal financial plan
No estate plan (other than a will)
No tax minimization strategy

Roger After
Roger needed to net $5.3 million from the sale after taxes in order to accomplish his goals
Roger’s company was worth $7 million, not $6 million
Even $7 million was too low to accomplish his goals
Value enhancement required
Tax minimization was a must, not an option

Keeping Score
The business was sold for $7.2 million
A controlled auction process was used
He netted $5,600,000 after taxes and transaction costs

The Client’s Investment
$25,000 in exit planning fees
$25,000 in legal and accounting fees
The exit plan showed Roger how to received $1.9 million more in after-tax proceeds than Roger had expected based on his prior efforts
Roger received a 38 to 1 return on his investment in less than three months

The Return
When the transaction closed we received a success fee of approximately $300,000 or 4.2% of the total transaction price.
In total, the combined cost of the exit planning and the investment banking process was $350,000.
Even including the investment banking fee, Roger received a 5.5 to 1 return on his money in less than 18 months.

The Peace of Mind
According to Roger, the best return on his investment was knowing that he had done everything possible to ensure his family’s financial security and that he and his family would now be able to retire with out financial worries.

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Small Business Succession Planning The CHRISTMAN Group LLC

by Alfredh on Apr 23, 2010

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Small Business Succession Planning The CHRISTMAN Group LLC Presentation Transcript