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Business Succession Planning Presentation
 

Business Succession Planning Presentation

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    Business Succession Planning Presentation Business Succession Planning Presentation Presentation Transcript

    • Business Succession Planning
    • During This Session You Will Learn: What is a Business Succession Plan  Why does every business need one  The components of a succession plan  How to start the process  Adapted from Business Succession Planning Model, Community Futures Meridian Region, Western Economic Diversification Canada Business Succession Planning
    • Business Succession Plan:  A Business Succession Plan is a multidisciplinary process providing a comprehensive and strategic approach to guiding the transition of business ownership.  It is a roadmap…you can never start too early  It is to be a dynamic document…changes with you  Used as a guide to manage the issues of transition  It allows the business owner to anticipate and manage change  Should be coordinated with the owner’s estate plan  Unique to each owner… “one size does not fit all” Business Succession Planning
    • Why do you need one?: Business Succession Planning
    • Why do you need one?:  A Business Succession Plan is an important component of any business’ strategic process. It will aid the business owner in:  Preparing for the time when they will retire  Addressing extreme matters such as illness or death  Securing the survival of the business through transition of ownership  Maximizing the return of the retiring owner’s investment  Minimizing tax burden at transfer Business Succession Planning
    • Why do you need one?:  By not preparing a Succession Plan the business owners risk:  Monetary loss due to unexpected estate, gift, and income tax issues  Huge gaps in wealth from lack of business valuation activities and financial planning  Jeopardizing the future of the business Business Succession Planning
    • Why do you need one?:  In summary a Business Succession Plan is needed:  Proactively identify the new owners Family, employees, third party or combination   To address the orderly departure of owners from a business  To address the transfer of ownership for an unplanned circumstance (i.e., partnership disagreements, illness, death) Business Succession Planning
    • The Reality For Business Owners  80% of business owners are exiting their business to retire, they are not serial entrepreneurs  The principal fear is “Will I have enough money so that I can fund my retirement lifestyle without running out of money”?  Other considerations may include wealth transfer to the next generation, charitable giving, and minimizing taxes  They want to identify the potential buyer/owner  They want to pass along a business legacy Business Succession Planning
    • The Reality For Business Owners  Typically 50-75% of a business owner’s net worth is in his/her business assets. The balance is in their personal real estate & financial investments  You only have ONE chance to transfer your largest asset Equities Real Estate Business Business Succession Planning
    • The Reality For Business Owners  Most business owners have only an anecdotal perception of the value of their business… “My brother in law knew a guy who had a business like mine that sold for…”  Relying on this type of perception can lead to large gaps in future wealth and quality of life  Important to have realistic expectations from the beginning Business Succession Planning
    • The Reality For Business Owners  85% of all small business owners do not have a Business Succession Plan, a wealth management plan, and/or an advisory team to assist them  Very few start the process early enough to achieve the maximum benefit of valuation and planning…its never too early Business Succession Planning
    • The Reality For Business Owners  Ideally the process should start when the business starts or becomes viable. It should encompass:  Entity structure  Owners as individuals  Shareholder, member, or partnership agreement Business Succession Planning
    • There Are Only 5 Places Your Money Can Go and/or Creditors Business Succession Planning
    • …And the 5th Place Your Money Can Go  Your advisors…pay a few modestly at the beginning and along the way  …Or pay many handsomely at the end  A Business Succession Plan will let YOU decide where your hard earned assets end up Business Succession Planning
    • Components of the Business Succession Plan Business Succession Planning
    • Components of the Business Succession Plan Establishing Goals and Objectives  Family Involvement in the Process  Identifying Successors  Estate Planning  Contingency Planning  Entity Structure, Transfer Methods, Taxes  Business Valuation  Exit Strategy  Implement & Follow-Up  Business Succession Planning
    • Establishing Goals and Objectives Business Succession Planning
    • Establishing Goals and Objectives  Owner retirement goals  How do you plan to spend your retirement?  Family member goals  Involved/not involved in business?  How will they be impacted?  Goals of other stakeholders (partners, employees)  Will business transfer to them?  How will the business operate during transition?  Goals for addressing disagreements, illness, and death  Assessing your risk tolerance Business Succession Planning
    • Family Involvement in the Process Business Succession Planning
    • Family Involvement in the Process  Communication  Establish a formal process of communication  Process for hearing concerns & opinions  Process for handling family change & disputes  Divorce, death, injury  May involve outside help (lawyers, accountants)  Family vision for the business  Relationship between family & business  Separate the two Business Succession Planning
    • Indentifying Successors Business Succession Planning
    • Indentifying Successors  Who will take over the business  Partner, Family member, employee, third party buyer  Training Successors  Establish a training plan  Build support for successors  Among family members, employees, customers, suppliers  Teach successor to build vision for the business  It may be different from yours  All affected parties must be “on board” Business Succession Planning
    • Estate Planning Business Succession Planning
    • Estate Planning  Provision for family members  Develop Estate and Personal Financial plans for owners, spouses, family members  Active & Non-active family members  Other financial considerations  Financial issues relating to the transfer of the business  Plan for the value at exit, provision for gaps Business Succession Planning
    • Estate Planning Gift Tax Annual Exclusion Applicable Applicable Maximum Year Amount Credit Exclusion Marginal Tax Per Donee Amount Amount Rate 2002 $11,000 $345,800 $1,000,000 50% 2003 $11,000 $345,800 $1,000,000 49% 2004 $11,000 $345,800 $1,000,000 48% 2005 $11,000 $345,800 $1,000,000 47% 2006 $12,000 $345,800 $1,000,000 46% 2007 $12,000 $345,800 $1,000,000 45% 2008 $12,000 $345,800 $1,000,000 45% 2009 $345,800 $1,000,000 45% 2010 $330,800 $1,000,000 35% 2011 $330,800 $1,000,000 35% Business Succession Planning
    • Estate Planning  Taxes  Must be carefully considered to retain wealth  Requires professional advice and thought out Exit Plan  Retirement Income  Identify sources and quantity of wealth required  Establish a wealth plan to preserve quality of life in retirement Business Succession Planning
    • Estate Planning Estate & Generation-Skipping Transfer Tax Applicable Applicable Maximum Year Credit Exclusion Marginal Tax Amount Amount Rate 2002 $345,800 $1,000,000 50% 2003 $345,800 $1,000,000 49% 2004 $555,800 $1,500,000 48% 2005 $555,800 $1,500,000 47% 2006 $780,800 $2,000,000 46% 2007 $780,800 $2,000,000 45% 2008 $780,800 $2,000,000 45% 2009 $1,455,800 $3,500,000 45% 2010 REPEALED 2011 and thereafter (unless Congress intervenes) $345,800 $1,000,000 50% Business Succession Planning
    • Contingency Planning Business Succession Planning
    • Contingency Planning  Plans rarely proceed smoothly  Economic downturns  Illness/death of owner or key employee  Natural disasters  Look at “What if” scenarios  Prepare a list of possible situations  Identify the course of action  Formalize it in a legal document  Fund contingencies with insurance or other investment vehicles Business Succession Planning
    • Entity Structure, Transfer Methods, Taxes Business Succession Planning
    • Entity Structure, Transfer Methods, Taxes  Identify roles & responsibilities  Family members & key employees should have clearly defined roles  Fill key positions  Management positions  Specialty positions  Structure organization based on the successor  Establish roles for family members  Separate ownership & management roles Business Succession Planning
    • Entity Structure, Transfer Methods, Taxes  Role of retiring owner  Advisor, Consultant, Chairman of Board  Identify key members of transfer team  Attorneys  Accountant  Intermediary  Business Brokerage or M&A Firm  Financial Partner Bank, SBA, Venture Capitalist, PEG  Business Succession Planning
    • Entity Structure, Transfer Methods, Taxes  2008 Tax Rates If taxable income is: The tax is: of the amount but not over-- Over-- over-- $ 0 $ 16,050 10% $ 0 16,050 65,100 $ 1,605.00 + 15% 16,050 65,100 131,450 8,962.50 + 25% 65,100 131,450 200,300 25,550.00 + 28% 131,450 200,300 357,700 44,828.00 + 33% 200,300 357,700 .... 96,770.00 + 35% 357,700 Business Succession Planning
    • Entity Structure, Transfer Methods, Taxes  2008 Tax Rates  Generally, gain from the sale of long-term (held more than 12 months) capital assets and qualified dividend income are subject to a maximum capital gains tax rate of 15% (0% for individuals in the 10% or 15% tax bracket through 2010). Business Succession Planning
    • Business Valuation Business Succession Planning
    • Business Valuation  Identifies what is being sold  Inventory, Equipment, Real Estate, Stock Establishes profitability  Assesses risk  Identifies value drivers  Scans marketplace  Considers financing strategies  Establishes relationship between earnings and value  Should be done cyclically with business planning  Business Succession Planning
    • Business Valuation Exit Avenue Method Authority Standard Employees  ESOP Fair Market Value with discounts for or IRS Trust marketability & minority Family Gifting share Market Value Managers MBO Managers or Buy Sell Agreements Investment Value Unrelated 3rd Party Direct Asset Buyer Market Valuation Individual or or & Strategic & Synergistic Strategic Stock Sale Seller Value Applied Business Succession Planning
    • Strategies for Maximizing Value  Value your business early… and often  Focus on implementing business improvements  Clean financial records & systems  Clear ownership and control of intellectual & tangible property  Owner is not the key employee  Succession plan for key management positions  Policy manual exists and is updated regularly  Customer concentration issues addressed  Facility and operation is clean and orderly  Minimal overlap between owner’s personal and business expenses Business Succession Planning
    • Exit Strategy Business Succession Planning
    • Exit Strategy  Transfer method  Family, employees, third party  Establishes timelines  Identifies schedule for implementation  Published & distributed to stakeholders  Clarifies roles and responsibilities  Allows resolution for issues prior to transfer  Aids in ensuring owner’s whishes are adhered to in case of illness or death Business Succession Planning
    • Implementation & Follow-Up  Review on same cycle as business planning  Update & modify as circumstances change  Conduct business valuations on same cycle to ensure that business is on track Business Succession Planning
    • Most business owners spend more time planning a family vacation than how to exit from their business. This is not due to a lack of desire or intelligence. It is simply because they don’t know how or where to begin. The vast majority of owners are unaware there is a specific planning and implementation process that can help ensure they achieve their objectives. Business Succession Planning