The Exit Planning Executive Briefing Presented by  Tom Doncaster, CLU, CWM   Member of Business Enterprise Institute’s Net...
The Executive Briefing for Business Owners <ul><li>Meet the Exit Planning Specialist </li></ul><ul><li>Thomas G. Doncaster...
Ingredients of a Successful Exit <ul><li>A written Exit Plan based on your objectives. </li></ul><ul><li>An experienced te...
The Seven Step Exit Planning Process™ <ul><ul><li>Step 1 –   Identify Exit Objectives   </li></ul></ul>Step 2  –   Quantif...
 
<ul><li>“ When a man does not know which harbor he is heading for, no wind is the right wind.” </li></ul><ul><li>- Seneca ...
Step One: Identify Exit Objectives <ul><li>Benefits to the Owner </li></ul><ul><li>Clarifies priorities. </li></ul><ul><li...
Step One: Identify Exit Objectives <ul><li>Universal Objectives </li></ul><ul><li>How much longer do you want to work in t...
Step One: Identify Exit Objectives <ul><li>Additional Objectives </li></ul><ul><li>Shift wealth to children. </li></ul><ul...
Step One: Identify Exit Objectives <ul><li>Working with a Team of Advisors </li></ul><ul><li>Who is on the team? </li></ul...
Step One: Identify Exit Objectives <ul><li>Who is on the Advisor Team? </li></ul><ul><li>Financial Planner </li></ul><ul><...
Step One: Identify Exit Objectives <ul><li>Why is a Team Necessary? </li></ul><ul><li>No one professional has all the answ...
<ul><li>Characteristics of an Exit Planning Advisor Team </li></ul><ul><li>At least one advisor is experienced in Exit Pla...
<ul><li>“ Beauty is in the eye of the buyer.” </li></ul>Step Two:  Quantify Business and Personal Financial Resources
Business Value <ul><li>Benefits to the Owner </li></ul><ul><li>Provides a baseline value by projecting cash flow. </li></u...
Business Value <ul><li>Do owners who transfer their </li></ul><ul><li>business to “insiders” want to </li></ul><ul><li>rec...
Business Value <ul><li>That’s right... </li></ul><ul><li>Minimum Value </li></ul>
Case Study: Golf Unlimited, Inc. <ul><li>Sale of Business for Maximum Value </li></ul>Fair Market Value  = $1,000,000 Cash...
Case Study: Golf Unlimited, Inc. <ul><li>Sale of Business for Minimum Value </li></ul>Seller   $300,000  Cash Flow  $835,0...
Case Study: Golf Unlimited, Inc. <ul><li>How Valuation Methods Impact Cash Needs </li></ul>MAXIMIZE  Value Sale for   $1,0...
<ul><li>“ Making a silk purse from a sow’s ear.” </li></ul>Step Three: Maximize and Protect Business Value
Step Three: Maximize and Protect Business Value <ul><li>Benefits to the Owner </li></ul><ul><li>Grow business value and in...
Step Three: Maximize and Protect Business Value <ul><li>Promote Value Through Value Drivers </li></ul><ul><li>Focus on inc...
Step Three: Maximize and Protect Business Value <ul><li>Promote Value Through Value Drivers </li></ul><ul><li>Restructure ...
<ul><li>“ Making a mountain out of a molehill.” </li></ul>Step Four: Ownership Transfer to Third Parties
Step Four: Ownership Transfer to Third Parties <ul><li>Benefits to the Owner </li></ul><ul><li>Cash at closing. </li></ul>...
Step Four: Ownership Transfer to Third Parties <ul><li>Current M & A Marketplace </li></ul><ul><li>20 percent of businesse...
Step Four: Ownership Transfer to Third Parties <ul><li>Third Party Sales – Not Just About the Business </li></ul><ul><li>A...
<ul><li>“ Making a molehill out of a mountain.” </li></ul>Step Five: Ownership Transfer to Insiders
Step Five: Ownership Transfer to Insiders <ul><li>Benefits to the Owner </li></ul><ul><li>Achieves Exit objective of: </li...
<ul><li>Owners must understand the need to </li></ul><ul><li>minimize income tax consequences </li></ul><ul><li>to buyer a...
<ul><li>Sale to a Third Party for Cash </li></ul>Fair Market Value = $1,000,000 Annual Cash Flow =  $250,000 Buyer Cash fo...
<ul><li>Sale to Employee for Installment Note </li></ul>Fair Market Value = $1,000,000 Cash Flow    =  $250,000 Employee C...
<ul><li>Cash Flow to Owner </li></ul>Fair Market Value = $1,000,000 Cash Flow    =  $250,000 Owner Cash flow from business...
<ul><li>Transfer to Employee: Phase I </li></ul>Fair Market Value = $500,000 - $1,000,000 Cash Flow   = $250,000 Step Five...
<ul><li>Transfer to Employee: Phase II </li></ul>Fair Market Value = $500,000 -$1,000,000 Cash Flow   = $250,000 Timing:  ...
<ul><li>Transfer to Employee: Phase I </li></ul>Fair Market Value = $5,000,000 - $10,000,000 Cash Flow    = $2,500,000 Ste...
<ul><li>Transfer to Employee: Phase II </li></ul>Fair Market Value = $5,000,000 -$10,000,000 Cash Flow    = $2,500,000 Tim...
<ul><li>“ Making sure the business continues when you don’t.” </li></ul>Step Six: Business Continuity Planning
Step Six: Business Continuity Planning <ul><li>Benefits to the Owner </li></ul><ul><li>Objectives can still be achieved if...
<ul><li>“ When the ‘slings and arrows’ of outrageous fortune befall you, fight back.” </li></ul><ul><li>- William Shakespe...
Step Seven: Personal Wealth and Estate Planning <ul><li>Benefits to the Owner </li></ul><ul><li>Preserve wealth, minimize ...
The Exit Planning Executive Briefing At some point, every owner leaves his or her business - voluntarily or otherwise. At ...
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Exec Briefing Component 1 Hour 2008+

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Business Exit Planning Strategies

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  • Hello. This is John Brown and this is the revised executive Exit Planning Executive Briefing. I am going to spend probably an hour and a half, maybe a little bit more today, going through this Executive Briefing. Your Executive Briefing isn’t going to be this long, certainly, but I’m going to also do a couple of things besides just give the Executive Briefing. I am going to make some comments on some of the slides, because some of these slides are new, and I want to explain why at least I think you should consider using the slides. Then secondly, I’m going to spend more time going through those slides that have charts with numbers on them, that have certain tax assumptions, so that you have a clear understanding of the assumptions I made, because the assumptions you make might very well be different based upon the state income tax law in your state. Also, if the capital gains tax changes here in the next year or so, then obviously the assumptions I made are going to have to change.
  • Exec Briefing Component 1 Hour 2008+

    1. 1. The Exit Planning Executive Briefing Presented by Tom Doncaster, CLU, CWM Member of Business Enterprise Institute’s Network Of Exit Planning Professionals™
    2. 2. The Executive Briefing for Business Owners <ul><li>Meet the Exit Planning Specialist </li></ul><ul><li>Thomas G. Doncaster, CLU, CWM </li></ul><ul><li>President, Doncaster Insurance & Financial Services </li></ul>
    3. 3. Ingredients of a Successful Exit <ul><li>A written Exit Plan based on your objectives. </li></ul><ul><li>An experienced team of advisors to design and implement the plan. </li></ul><ul><li>Cash flow and a quantified business value. </li></ul><ul><li>A strong management team in place. </li></ul><ul><li>Time </li></ul>
    4. 4. The Seven Step Exit Planning Process™ <ul><ul><li>Step 1 – Identify Exit Objectives </li></ul></ul>Step 2 – Quantify Business and Personal Financial Resources Step 3 – Maximize and Protect Business Value Step 4 – Ownership Transfer to Third Parties Step 5 – Ownership Transfer to Insiders Step 6 – Business Continuity Step 7 – Personal Wealth and Estate Planning
    5. 6. <ul><li>“ When a man does not know which harbor he is heading for, no wind is the right wind.” </li></ul><ul><li>- Seneca </li></ul>Step One: Identify Exit Objectives
    6. 7. Step One: Identify Exit Objectives <ul><li>Benefits to the Owner </li></ul><ul><li>Clarifies priorities. </li></ul><ul><li>Facilitates progress by identifying a desired outcome. </li></ul><ul><li>Focuses energy on most urgent concerns. </li></ul><ul><li>Controls and defines the Exit Planning Process. </li></ul>
    7. 8. Step One: Identify Exit Objectives <ul><li>Universal Objectives </li></ul><ul><li>How much longer do you want to work in the business before retiring or moving on? ________ years </li></ul><ul><li>What annual after-tax income do you want during retirement (in today’s dollars)? $________ </li></ul><ul><li>To whom do you want to transfer the business? </li></ul><ul><ul><li>Family? </li></ul></ul><ul><ul><li>Co-Owner? </li></ul></ul><ul><ul><li>Key Employee(s)? </li></ul></ul><ul><ul><li>Outside party? </li></ul></ul><ul><ul><li>ESOP? </li></ul></ul>
    8. 9. Step One: Identify Exit Objectives <ul><li>Additional Objectives </li></ul><ul><li>Shift wealth to children. </li></ul><ul><li>Provide charitable gifts or transfers. </li></ul><ul><li>Reward employees. </li></ul><ul><li>Receive full value for the business. </li></ul><ul><li>Take business to the next level. </li></ul>
    9. 10. Step One: Identify Exit Objectives <ul><li>Working with a Team of Advisors </li></ul><ul><li>Who is on the team? </li></ul><ul><li>Why is a team necessary? </li></ul><ul><li>How do team members work to minimize fees and costs? </li></ul>
    10. 11. Step One: Identify Exit Objectives <ul><li>Who is on the Advisor Team? </li></ul><ul><li>Financial Planner </li></ul><ul><li>Insurance Advisor </li></ul><ul><li>Investment Advisor </li></ul><ul><li>Business Attorney </li></ul><ul><li>Estate Planning Attorney </li></ul><ul><li>CPA </li></ul><ul><li>Valuation Specialist </li></ul><ul><li>Business Broker </li></ul><ul><li>Investment Banker </li></ul><ul><li>Business or Management Consultant </li></ul><ul><li>Banker </li></ul>
    11. 12. Step One: Identify Exit Objectives <ul><li>Why is a Team Necessary? </li></ul><ul><li>No one professional has all the answers. </li></ul><ul><li>Diverse skills and talents are necessary. </li></ul><ul><li>Team approach minimizes time and cost. </li></ul><ul><ul><li>If properly facilitated and led. </li></ul></ul>
    12. 13. <ul><li>Characteristics of an Exit Planning Advisor Team </li></ul><ul><li>At least one advisor is experienced in Exit Planning. </li></ul><ul><li>Team members are willing to work together on a timely basis. </li></ul><ul><li>Team uses Action Item Checklists as its written road map. </li></ul><ul><li>Team creates a written Exit Plan. </li></ul>Step One: Identify Exit Objectives
    13. 14. <ul><li>“ Beauty is in the eye of the buyer.” </li></ul>Step Two: Quantify Business and Personal Financial Resources
    14. 15. Business Value <ul><li>Benefits to the Owner </li></ul><ul><li>Provides a baseline value by projecting cash flow. </li></ul><ul><li>Measures business and personal resources both today and as a basis for future projections. </li></ul><ul><li>Allows you to monitor progress toward the stated objectives. </li></ul>
    15. 16. Business Value <ul><li>Do owners who transfer their </li></ul><ul><li>business to “insiders” want to </li></ul><ul><li>receive maximum value or </li></ul><ul><li>minimum value for their </li></ul><ul><li>ownership interests? </li></ul>
    16. 17. Business Value <ul><li>That’s right... </li></ul><ul><li>Minimum Value </li></ul>
    17. 18. Case Study: Golf Unlimited, Inc. <ul><li>Sale of Business for Maximum Value </li></ul>Fair Market Value = $1,000,000 Cash Flow = $1,700,000 Buyer Available Cash Flow $1,700,000 Income Tax Payment - $700,000 Total for Purchase $1,000,000 Seller Buyer’s Purchase $1,000,000 Capital Gains Tax - $200,000 Payment for Business $800,000
    18. 19. Case Study: Golf Unlimited, Inc. <ul><li>Sale of Business for Minimum Value </li></ul>Seller $300,000 Cash Flow $835,000 Capital Gains Tax - $60,000 Income Tax -$275,000 Payment for Business $800,000 Fair Market Value = $300,000 Buyer Cash Flow $450,000 Income Tax - $150,000 $300,000
    19. 20. Case Study: Golf Unlimited, Inc. <ul><li>How Valuation Methods Impact Cash Needs </li></ul>MAXIMIZE Value Sale for $1,000,000 Required Cash Flow $1,700,000 MINIMIZE Value Sale for $300,000 Required Cash Flow $450,000 Deductible Cash from Biz $835,000 Total Cash Flow Needed $1,285,000
    20. 21. <ul><li>“ Making a silk purse from a sow’s ear.” </li></ul>Step Three: Maximize and Protect Business Value
    21. 22. Step Three: Maximize and Protect Business Value <ul><li>Benefits to the Owner </li></ul><ul><li>Grow business value and intangible value of the business. </li></ul><ul><li>Reduce income taxes upon sale of business. </li></ul><ul><li>Protect assets from potential business and personal creditors. </li></ul><ul><li>Create ability to sell the business. </li></ul><ul><li>Motivate and keep Key Employees. </li></ul>
    22. 23. Step Three: Maximize and Protect Business Value <ul><li>Promote Value Through Value Drivers </li></ul><ul><li>Focus on increasing cash flow. </li></ul><ul><li>Develop operating systems that improve sustainability of cash flows. </li></ul><ul><li>Document sustainability of earnings. </li></ul><ul><li>Improve company performance as measured by industry metrics. </li></ul><ul><li>Pay down debt. </li></ul>
    23. 24. Step Three: Maximize and Protect Business Value <ul><li>Promote Value Through Value Drivers </li></ul><ul><li>Restructure organization. </li></ul><ul><li>Solidify and diversify customer base. </li></ul><ul><li>Implement strategies to grow the company. </li></ul><ul><li>Develop and protect proprietary technology. </li></ul><ul><li>Build a solid management team and groom a successor. </li></ul>
    24. 25. <ul><li>“ Making a mountain out of a molehill.” </li></ul>Step Four: Ownership Transfer to Third Parties
    25. 26. Step Four: Ownership Transfer to Third Parties <ul><li>Benefits to the Owner </li></ul><ul><li>Cash at closing. </li></ul><ul><li>Eliminate financial risk. </li></ul><ul><li>No family succession issues. </li></ul><ul><li>Speed of exit. </li></ul>
    26. 27. Step Four: Ownership Transfer to Third Parties <ul><li>Current M & A Marketplace </li></ul><ul><li>20 percent of businesses are for sale, but only one out of four actually sells. </li></ul><ul><li>Businesses with sales of $10 million per year aren’t much better – only one-third sell. </li></ul><ul><li>Above $10 million per year, the odds improve to 50-50. </li></ul>- 2005 Business Reference Guide by Tom West
    27. 28. Step Four: Ownership Transfer to Third Parties <ul><li>Third Party Sales – Not Just About the Business </li></ul><ul><li>Ability to sell and business value are determined by: </li></ul><ul><ul><li>Intrinsic Value: the value drivers. </li></ul></ul><ul><ul><li>Extrinsic Value: the value the market places on the business. </li></ul></ul><ul><ul><li>Effectiveness of the sale process. </li></ul></ul>
    28. 29. <ul><li>“ Making a molehill out of a mountain.” </li></ul>Step Five: Ownership Transfer to Insiders
    29. 30. Step Five: Ownership Transfer to Insiders <ul><li>Benefits to the Owner </li></ul><ul><li>Achieves Exit objective of: </li></ul><ul><ul><li>Selling to Key Employee Group (KEG). </li></ul></ul><ul><ul><li>Transferring to a Child. </li></ul></ul><ul><li>Motivates and retains Key Employees. </li></ul><ul><li>Planning reduces risk and increases amount of money received. </li></ul>
    30. 31. <ul><li>Owners must understand the need to </li></ul><ul><li>minimize income tax consequences </li></ul><ul><li>to buyer and seller by </li></ul><ul><li>minimizing ownership value of business. </li></ul>Step Five: Ownership Transfer to Insiders
    31. 32. <ul><li>Sale to a Third Party for Cash </li></ul>Fair Market Value = $1,000,000 Annual Cash Flow = $250,000 Buyer Cash for purchase Seller $800,000 Net of Taxes Timing: NOW Step Five: Ownership Transfer to Insiders
    32. 33. <ul><li>Sale to Employee for Installment Note </li></ul>Fair Market Value = $1,000,000 Cash Flow = $250,000 Employee Cash flow from business $250,000 - $150,000 (net of taxes) Cash to Seller $120,000 (net of taxes) Owner $800,000 Net of Taxes Timing: 7 – 9 years Step Five: Ownership Transfer to Insiders
    33. 34. <ul><li>Cash Flow to Owner </li></ul>Fair Market Value = $1,000,000 Cash Flow = $250,000 Owner Cash flow from business $250,000 ( $150,000 net of taxes) to owner Seller/ Owner $800,000 Net of Taxes Timing: 5 years Step Five: Ownership Transfer to Insiders
    34. 35. <ul><li>Transfer to Employee: Phase I </li></ul>Fair Market Value = $500,000 - $1,000,000 Cash Flow = $250,000 Step Five: Ownership Transfer to Insiders Seller $50,000 After Taxes $150,000 After 3 Years Employee 40% of Stock sold to Employee for $200,000 ($100,000 of cash flow per year to Employee) Seller $106,667 After Taxes $320,000 After 3 Years Owner Cash flow from business $150,000 per year
    35. 36. <ul><li>Transfer to Employee: Phase II </li></ul>Fair Market Value = $500,000 -$1,000,000 Cash Flow = $250,000 Timing: 3 years Seller $470,000 Net of Taxes Employee 60% of Stock sold to Employee for $600,000 Total $950,000 After 3 Years Step Five: Ownership Transfer to Insiders
    36. 37. <ul><li>Transfer to Employee: Phase I </li></ul>Fair Market Value = $5,000,000 - $10,000,000 Cash Flow = $2,500,000 Step Five: Ownership Transfer to Insiders Seller $500,000 After Taxes $1,500,000 After 3 Years Employee 40% of Stock sold to Employee for $2,000,000 ($1,000,000 of cash flow per year to Employee) Seller $900,000 After Taxes $2,700,000 After 3 Years Owner Cash flow from business $1,500,000 per year
    37. 38. <ul><li>Transfer to Employee: Phase II </li></ul>Fair Market Value = $5,000,000 -$10,000,000 Cash Flow = $2,500,000 Timing: 3 years Seller $4,800,000 Net of Taxes Employee 60% of Stock sold to Employee for $6,000,000 Total $9,000,000 After 3 Years Step Five: Ownership Transfer to Insiders
    38. 39. <ul><li>“ Making sure the business continues when you don’t.” </li></ul>Step Six: Business Continuity Planning
    39. 40. Step Six: Business Continuity Planning <ul><li>Benefits to the Owner </li></ul><ul><li>Objectives can still be achieved if you don’t survive your exit. </li></ul><ul><li>Retains ownership and control of company if co-owner departs. </li></ul><ul><li>Can force non-contributing owners to leave the business. </li></ul><ul><li>Provides consistency between lifetime and death objectives. </li></ul><ul><li>Ensures survival of the business for the benefit of others. </li></ul><ul><li>Results in family receiving value of owner’s interest, in cash. </li></ul>
    40. 41. <ul><li>“ When the ‘slings and arrows’ of outrageous fortune befall you, fight back.” </li></ul><ul><li>- William Shakespeare (Hamlet) </li></ul>Step Seven: Personal Wealth and Estate Planning
    41. 42. Step Seven: Personal Wealth and Estate Planning <ul><li>Benefits to the Owner </li></ul><ul><li>Preserve wealth, minimize taxes using both lifetime and death planning tools. </li></ul><ul><li>Coordinates and integrates lifetime exit objectives wishes with estate plan. </li></ul><ul><li>In effect, estate planning becomes part of business planning. </li></ul>
    42. 43. The Exit Planning Executive Briefing At some point, every owner leaves his or her business - voluntarily or otherwise. At that time, every owner wants to receive the maximum amount of money in order to accomplish personal, financial, income and estate planning goals. Registered Representative offering securities and advisory services through Independent Financial Group, LLC, a registered broker-dealer and Investment Advisor. Member FINRA and SIPC. Doncaster Insurance and Financial Services, Inc and Independent Financial Group, LLC are unafilliated.

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