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Business Valuation

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A brief synopis on a couple of the techniques used to value a business.

A brief synopis on a couple of the techniques used to value a business.


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  • 1. Ameriprise Financial Daniel J. Lensing, CRPC® Financial Advisor 14755 No. Outer Forty Chesterfield, MO 63017 636-534-2097 daniel.j.lensing@ampf.com Business Valuation September 17, 2009
  • 2. Ameriprise Financial Page 2 of 20 Table of Contents Determining the Value of Your Business .......................................................................................................... 4 What is valuation? ....................................................................................................................................4 What is the importance of determining taxable value? ............................................................................ 4 Why a valuation might be needed ............................................................................................................4 Valuation issues ....................................................................................................................................... 5 Different definitions of value .....................................................................................................................6 How do you determine the taxable value of your business? ....................................................................7 Asset Approach Valuation .................................................................................................................................9 What is it? ................................................................................................................................................ 9 When is it used? .......................................................................................................................................9 How is it used? .........................................................................................................................................9 Income Approach Valuation .............................................................................................................................. 10 What is it? ................................................................................................................................................ 10 When is it used? .......................................................................................................................................10 How is it used? .........................................................................................................................................10 Market Approach Valuation ...............................................................................................................................11 Definition .................................................................................................................................................. 11 When is it used? .......................................................................................................................................11 Comparisons can be difficult .................................................................................................................... 11 How is it used? .........................................................................................................................................12 Business Valuation Diagram ............................................................................................................................. 13 Planning for Succession of a Business Interest ................................................................................................ 14 Business succession planning--what is it? ...............................................................................................14 Transferring your business interest with a buy-sell agreement ................................................................14 Sell your business interest ....................................................................................................................... 14 Transfer your business interest through lifetime gifts ...............................................................................15 Transfer your business interest at death through your will or trust .......................................................... 16 See disclaimer on final page September 17, 2009
  • 3. Ameriprise Financial Page 3 of 20 Choosing the right type of succession plan ..............................................................................................16 Planning for Business Succession Checklist .................................................................................................... 17 See disclaimer on final page September 17, 2009
  • 4. Ameriprise Financial Page 4 of 20 Determining the Value of Your Business What is valuation? Assignment of price or dollar value The basic concept of valuation is to determine a justifiable dollar value or price for a total or partial interest in your closely held business. It is the process of answering the question, " How much is your closely held business worth? " Business valuation plays a critical role in determining gift and estate tax liability and/or the appropriate selling price for an interest. Because valuing a business is so important, you should be very careful when selecting an appraiser. What is the importance of determining taxable value? Business valuation key component to estate or succession planning Business valuation is a critical component to your estate or business succession planning. Your business may be your largest asset, and if you plan to engage in either one of these types of planning, at some point you will need to determine the taxable value of your business interest. An incorrect value (i.e., one that is underestimated) could cause you to miss out on tax-saving strategies, while a value that is inflated could result in an investment of time and money in unnecessary planning. The IRS is very interested in taxable value Perhaps a key reason to be concerned about the taxable value of your business is the Internal Revenue Service (IRS), which is always on the lookout for sales at below and even above fair market value. If you sell something for less than fair market value, the IRS could deem the transaction a combination sale and gift and charge you gift tax on the difference between the value you received and the value the IRS calculated. Likewise, a sale at above fair market value could be deemed a gift (subject to gift tax) from the buyer to you. Your tax liability depends on it The value applied to your business bears an important and direct relationship to the amount of tax you will owe, whether it be capital gains tax resulting from a sale, gift tax on shares you have given away, or estate tax on property you own at your death. If the value determined by the IRS is different than the value your tax was calculated on, you (or your estate) could be liable for additional tax. Why a valuation might be needed May be no active market to set price The valuation of large, publicly traded companies such as those found on the New York or the American Stock Exchanges is usually set by the buyers and sellers in the market through active trading. This price is generally accepted as the fair market value. With a closely held business, however, there isn't an active market for the stock, so valuation becomes much more challenging. A determination of the value of your business should be conducted for gift or estate tax purposes or to engage in the sale of your business. Determine capital gain When you sell your business, the difference between your basis and the price you receive is your capital gain. Your gain must be reported and is subject to capital gain tax. A properly conducted business valuation can ensure that the price at which your interest is sold represents fair market value and that your tax liability is correct. See disclaimer on final page September 17, 2009
  • 5. Ameriprise Financial Page 5 of 20 Sale of business to family member You may be selling your business interest to a family member. You should be aware that the IRS tends to carefully examine this type of sale in search of disguised gifts. If the IRS determines a higher value for your business than the sale price you used, you might very well be liable for gift tax on the difference between the two values. Further, it usually takes a couple of years before the IRS challenges the value, and your additional tax liability may be compounded by accrued interest and penalties. A valuation by a qualified appraiser could avoid this potential problem. Sale of business to outsider If you are planning to sell your business to a nonfamily party, you may want to receive the highest amount possible. An independent evaluation may help you to achieve this objective while at the same time assuring the buyer that the price being paid is fair. Without a valuation from an independent, qualified appraiser, it might be harder to attract buyers due to the perception that the business is being overvalued by the seller. The timing and circumstances of the sale will also have an impact on the value. A forced liquidation or sale (one where the money is needed fast) will generally result in a lower valuation and price received. Transfer of business under buy-sell agreement If you have a buy-sell agreement for your business, you already have a buyer for your interest upon the occurrence of certain events. If correctly done, your buy-sell may have been specially drafted to establish taxable value. The terms of your buy-sell may require a periodic valuation of the business. When an interest changes hands under the agreement, a valuation is needed for the price exchanging hands, which sets the tax basis for the buyer and the capital gain of the seller. Transfer of interest by gift Part of your estate planning strategy may be to transfer your business interest by gift. Gifts of a certain size are not subject to gift tax. In order to determine if you must pay gift tax (and, if so, how much), you need to know the value of the gift. Any time a business interest is transferred by gift, a valuation should be conducted to document the gift tax value and reduce the risk of the IRS changing the value of the gift upon a later audit. Tip: Do the valuation as closely as possible to the date of the gift. Estate tax purposes A business valuation may be required when an owner dies. A valuation at this point can ensure that all applicable discounts are reflected in the value. It is also of major importance in determining the estate tax liability. The last thing your estate needs is to be subjected to an IRS audit and have poor (or no) documentation of the business valuation used in the estate tax return. If the business has a buy-sell agreement, a valuation may be needed to calculate the price at which the interest will be sold to the buyer named in the agreement. Valuation issues Appraisal versus value An appraisal is the process of determining value and represents an opinion. The result of the appraisal analysis is the assignment of a value based on a specific point in time. There is no one process and generally no one definitive value for a business. It is possible for a business to have different values, depending on the purpose of the evaluation and the interpretation of the criteria examined. Because there is no single method or definition, it is important that the appraisal report contain a specific definition of value and the assumptions used in the analysis. Multiple approaches to determining value There is more than one way to approach a business valuation. The nature of the business itself may indicate that one way is more appropriate than another, and while there are general rules, it is still more art than science. See disclaimer on final page September 17, 2009
  • 6. Ameriprise Financial Page 6 of 20 Furthermore, appraisers are at their own discretion in determining if intangibles, fair market values or liquidation values will be used. Appraisers using the same named approaches may use different techniques to determine the value. As a result, sometimes multiple, independent valuations are conducted, and an average result is used. The table below shows three common valuation methods: Method Methodology Income approach Value is based on expected income generation Asset approach Value is determined on basis of business assets Market approach Value is based on past sales of shares of this or a similar business Valuation may be discounted The value of certain ownership interests may be discounted (reduced), depending on certain conditions. Sometimes, a minority stock interest in a closely held corporation is granted a discount for estate tax purposes when it is included in the owner's gross estate. The discount is granted because the minority interest itself carries no ability to influence corporate decisions or policy, which in turn reduces its marketability to anyone but the controlling shareholders. A minority interest that cannot influence policy but is large enough to represent a swing vote could have a valuation discount disputed by the IRS. Valuation can be disputed A lot of factors can affect the value of a business. Disputes between taxpayers and the IRS involving the valuation of property occur relatively frequently. To complicate things, even the IRS acknowledges that there is no one, true, fair market value for a closely held business, so the area is open to interpretation. Moreover, not only might the valuation be subject to dispute, but inaccurate valuations for tax purposes could be subject to civil and criminal penalties. Timing is important Transactions are valued by the IRS on the date of the transfer. To reduce the chance of the IRS calculating a value that differs greatly from the value you paid tax on, your valuation should be determined (and documented) as closely to the transaction date as possible. Event Valuation Date Type of Tax Gift Date of completion of gift transfer Gift tax Sale Date of sale Capital gains tax Death Date of death OR alternate valuation date six months after death Estate tax Tip: It is important to get an accurate appraisal of the value of a business interest any time the business is transferred as a result of lifetime gift, sale, or bequest. Different definitions of value Fair market value Fair market value (FMV) is the price at which property would change hands between a willing buyer and a willing seller (who are independent, nonfamily members), where both parties have reasonable knowledge of the relevant facts, and neither party is under any compulsion to buy or sell. This is the definition frequently used by the IRS. See disclaimer on final page September 17, 2009
  • 7. Ameriprise Financial Page 7 of 20 Fair value Fair value is different from fair market value, and as used here, it is different from the accounting definition. In business valuation, fair value is a statutory standard generally applied in cases involving dissenting shareholders and sometimes in suits involving corporate dissolution, merger, sale, or auction. The determination of fair value is usually applied to minority interests when the minority shareholders believe they won't receive full consideration for their shares under the merger, sale, or dissolution. The minority shareholders have their shares appraised and receive an amount of cash equal to the fair value in exchange for the shares. Investment value Investment value is specific to an owner (or prospective owner) and includes consideration of factors such as the owner's knowledge, abilities, related business interests, and expectation of earning potential and risk. A business will likely have different investment values to different people, depending on specific factors (i.e., the value is in the eyes of the beholder). Intrinsic or fundamental value Intrinsic value is a term that carries different meanings to different professionals. In some cases, it is used to refer to fair market value, fair value, investment value, or even some other type of value. Sometimes it is used to refer to the analysis of an investment banker, security analyst, or financial manager or analyst. The point is, this term has several meanings and interpretations, so it is very important that any valuation including this term have a very specific definition of its usage. Going concern value A going concern value considers factors specific to the business, both physical and intangible. Consideration is given to the existing infrastructure, goodwill, reputation, trained workforce, licensing, and/or plant capabilities of the business. The valuation is based on the assumption that the business will continue to be a viable operating entity and as such should bear a higher value than the sum of the values of its collective assets. Liquidation or breakup value Liquidation value is a determination of the proceeds (net of selling costs) realized if a company ceased operating and sold off the assets. There are two types of liquidation, and the specific situation will affect the valuation. An orderly liquidation involves the sale of assets over a period of time to maximize proceeds. A forced liquidation, on the other hand, means selling the assets as quickly as possible (often by auction) and often at a lower value than might otherwise be achieved if more time were available. Book value Book value is an accounting term that can apply to a specific asset or an entire company. An asset's book value equals the historical cost minus any allowances for depreciation, amortization, or unrealized losses. The book value for a company is the shareholders' equity, calculated from the balance sheet as the excess of total assets over total liabilities. How do you determine the taxable value of your business? Find a qualified appraiser Determining the value of your business is not something you should attempt on your own, especially in light of the fact that the IRS could challenge your valuation. There are appraisers who specialize in determining the value of businesses. Your CPA may even be one of these specialists or know someone who is. See disclaimer on final page September 17, 2009
  • 8. Ameriprise Financial Page 8 of 20 Don't use an old appraisal You may have had your business appraised in the past for another purpose. As tempting as it might be, don't use an old appraisal now. The purpose of the appraisal can affect the valuation assigned, and time can change the factors that go into the appraisal calculation. See disclaimer on final page September 17, 2009
  • 9. Ameriprise Financial Page 9 of 20 Asset Approach Valuation What is it? Under the asset approach, the fair market value for the closely held business is determined based on the value of its assets. When is it used? Sometimes a business is only worth what it owns. The asset approach is used for such businesses. Generally, these would include: • Businesses that don't engage in significant activities, like investment or holding companies • Businesses that are generating losses • Businesses that are in (or will be in) liquidation The asset approach generally isn't appropriate for an active business because the business is probably worth more than just its assets. However, some appraisers would argue that the asset approach is appropriate where an active business isn't using its assets to their full potential and the business would be worth more if liquidated. How is it used? An appraiser using the asset approach in its simplest form determines the value of the assets that the business owns, subtracts outstanding liabilities, and concludes that the remainder is what the business is worth. Appraisers are at their discretion in determining if intangibles, fair market values, or liquidation values will be used. Appraisers using the same named approach may use different techniques to determine the value. Technical Note: While there are no set definitions for the asset approach, there are some general methods that your appraiser might use: • Adjusted net assets method: Determine value of assets and subtract liabilities • Adjusted book value method: Determine book value of assets, then add value of intangible assets • Liquidation value: Determine value that assets could be sold for in a liquidation sale See disclaimer on final page September 17, 2009
  • 10. Ameriprise Financial Page 10 of 20 Income Approach Valuation What is it? Under the income approach valuation, the fair market value of a closely held business is determined based on how much income the business is expected to generate in the future. The appraiser thinks of the business as a goose that lays golden eggs. How much would you pay for the goose? Find out how many golden eggs the goose lays, consider the chances that the goose will stop laying eggs, and make a valuation decision. When is it used? In most cases, the income a business generates is the best way of determining what the business is worth. The income method is therefore probably the most common valuation approach, especially in valuing small, operating businesses. Specifically, this approach is used on service businesses or other noncapital-dependent businesses. Generally, the primary alternative to the income approach is the market approach. Some appraisers believe that the Internal Revenue Service (IRS) prefers the market approach, especially if the business is comparable in some way to a publicly traded business. The preference for the market approach may be motivated by the fact that the market approach often results in a higher value. How is it used? In general terms, the appraiser will consider how much income the business generates now, consider the odds that the business will continue to generate that much income in the future, and then decide how much such an income stream is worth. Appraisers use discretion in determining which factors will be used. Appraisers using the same named approach may use different techniques to determine the value. Technical Note: While there are no set definitions for the income approach, there are some general methods that your appraiser might use: • The capitalization of earnings or discounted earnings method: Determine earnings, then capitalize those earnings--calculating how much an investor would expect to earn on such an investment. • The capitalization of income method: Determine some income number (possibly before-tax income, after-tax income, net income, gross income, or operating income), multiply that amount by a percentage that accurately anticipates growth, then determine how much money a rational investor would invest to get that return. • The discounted cash flow or discounted income method: Determine how much money the business will generate in the future and discount that to its present value. Caution: You and the IRS are most likely to disagree on the capitalization or discount rate that is applied. This is probably because a small shift in the rate can have a dramatic difference in the fair market value. Since there is no objectively correct rate, the best you can do is carefully select an appraiser to decide the rate you will use. See disclaimer on final page September 17, 2009
  • 11. Ameriprise Financial Page 11 of 20 Market Approach Valuation Definition Under the market approach valuation, the fair market value of the business is determined based on what people have paid for shares of this business in the past or for shares of comparable businesses. The appraiser tries to determine what investors in the stock market would pay for this business, based on what they actually have paid for shares of this or a comparable company. When is it used? The market approach can be used for any type of business, but it will usually be appropriate only if the appraiser can find a comparable sale. There are generally only comparable sales in two situations: There have been recent sales of shares in the business If shares in your company have been sold in the past, that sale might be evidence of what the business is worth. For instance, if you bought your business last year for $500,000, it is probably logical to conclude that it is worth around $500,000 now. Similarly, if your partner sold his one-third share of the business for $1.2 million, that is strong evidence that your one-sixth share of the business is worth $600,000. This assumes, of course, that the original transactions were at arm's length. Your business is comparable to a publicly traded business If your company has enough similarity to a company that has been sold (either in parts, in stock sales, or as a whole in a merger or acquisition), an appraiser might conclude that the value of that company is evidence of what your company is worth. The market approach is very similar to the approach used to value houses. If a three-bedroom, 2,000-square-foot house next door sells for $300,000, and a three-bedroom, 2,150-square-foot house down the block sells for $310,000, an appraiser will logically conclude that your 2,100-square-foot three-bedroom house has a fair market value near $310,000. Comparisons can be difficult The problem, of course, is that there are more differences between closely held businesses than houses. Is one 700-square-foot hamburger restaurant (Billy's Burger Barn) worth about the same as another? Is one hamburger franchise worth about the same as another? Most experts would agree that the market approach works best with larger closely held businesses that have the characteristics (like size and marketability) of a public company. The difficulty in finding a public company that is comparable to a closely held company is even more pronounced, based on several factors: • Few public companies are as small as the average closely held business • Taking a public company as a representative sample is probably not statistically accurate, since there are many more (perhaps 100 times more) closely held businesses than public companies • Many closely held businesses don't have a comparable public counterpart • Closely held businesses aren't as diversified as public companies (which significantly increases the risk inherent in a closely held business) See disclaimer on final page September 17, 2009
  • 12. Ameriprise Financial Page 12 of 20 • Public companies generally don't have one majority shareholder, which is often one of the most significant elements of a closely held business The value of the shares of a public company may be affected by market factors not relevant to a closely held business. How is it used? The guideline company method Identify a comparable company and then use a formula (like multiple of earnings or percentage of book value) to adjust its value to the value of the business in question. This involves discovering the guideline company's price-to-net earnings ratio, price-to-cash flow ratio, price-to-sales ratio, and price-to-book value ratio, and using those to determine your price. This information probably isn't available from private companies, so comparison is usually made to public companies. For instance, if a publicly traded clothing retailer is worth $100 million, and that amount is seven times its cash flow, then a comparable closely held business with $100,000 in cash flow would have a value of $700,000. The value will also have to be adjusted to take other variations, like a lack of marketability for a closely held business, into account. The industry method In certain industries, experts have concluded that the value of any company in that business can be determined by looking at a standard ratio. For example, an expert concludes that your radio station is worth five times its annual advertising revenue. Your radio station is therefore worth five times its $200,000 advertising revenue, or $1 million. Actual sales Look at recent sales of interests in a guideline business and adjust. However, the fact that most such transactions are between family members probably makes this method unacceptable. See disclaimer on final page September 17, 2009
  • 13. Ameriprise Financial Page 13 of 20 Business Valuation Diagram See disclaimer on final page September 17, 2009
  • 14. Ameriprise Financial Page 14 of 20 Planning for Succession of a Business Interest Business succession planning--what is it? One of the important decisions a business owner must face is when and how to step out of the business--in other words, business succession planning. Do you expect to retire from your business? Do you have a plan in place? What would happen to your business if you were to die today? Do you have children you hope to bring into the business? These are questions only you can answer, and your answers will lead you and your financial and legal advisors to a course of action. When you develop a succession plan for your business you have two basic choices: you can sell your business, or you can give it away. Once you choose to either sell or gift, you can structure your plan to go into effect during your lifetime or at your death. Transferring your business interest with a buy-sell agreement You can transfer your business interest with a buy-sell agreement, a legal contract that prearranges the sale of your business interest. It allows you to keep control of your interest until the occurrence of an event specified in the agreement, such as your death, disability, or retirement. A buy-sell agreement can help you to solve the problems inherent in attempting to sell a closely held business. When you structure your agreement, you can tailor it to your needs. With a buy-sell agreement, you choose the events requiring a sale When you draft your buy-sell agreement, you establish the triggering events, meaning those events under which the sale can or must happen. Common triggering events include death, disability, or retirement. Other events like divorce or bankruptcy can also be included as triggering events under a buy-sell agreement. A buy-sell agreement provides a ready buyer for your interest At the occurrence of the triggering event, the buyer is obligated to buy your interest from you or your estate. The buyer can be a person, a group (such as co-owners), the business itself, or a combination. You (or your family or estate) are spared the task of trying to find a buyer when you are ready to sell. Price and sale terms are prearranged A major function of the buy-sell agreement is the establishment of the pricing mechanism for the sale of the business interest. The payment method is typically also determined at the time the agreement is drafted. The major sale negotiation is conducted at a time when there is no pressure to sell. This eliminates the need for a fire sale when you retire, become ill, or die; and it may result in greater overall fairness in the deal. A buy-sell agreement can interfere with other estate planning Once you are bound under a buy-sell agreement, you can't sell or give your business to anyone except the buyer named in the agreement without the buyer's consent. This could restrict your ability to reduce the size of your estate through lifetime gifts of your business interest, unless you carefully consider and coordinate your estate planning goals with the terms of your buy-sell agreement. Sell your business interest The major benefits when you sell your business interest are control and cash: you keep control of your interest or business assets until you are ready to let go, and you decide how much or how little you want to sell. See disclaimer on final page September 17, 2009
  • 15. Ameriprise Financial Page 15 of 20 Selling allows you to receive cash (or convertible assets) and choose the timing When you sell your business interest or assets, you receive cash (or assets you can convert to cash) that can be used to maintain your lifestyle or pay your estate expenses. You can choose when you want to sell--now, at your retirement, at your death, or at some point in-between. You can sell your interest during your lifetime, and receive cash to use for your retirement, a new business venture, or that trip around the world you've been putting off. When done at your death, an asset sale can provide cash for your estate to use in paying your final expenses or for distribution to your beneficiaries. A limited market means a sale could be difficult There is often no market for the sale of a closely held business, which could make finding a buyer for your interest difficult. Some assets, such as equipment, may have a specialized use or a short time frame of technological usefulness. If your business is a service business, it may be hard to find a buyer for intangible assets such as your customer list. The level of competition in your geographic area or business field could also affect your ability to find a buyer. When the sale occurs after your death, your family or estate may be at a distinct disadvantage when negotiating with a potential buyer. The interested buyer can be expected to try to take advantage of your family's need for cash to settle your estate expenses and offer a price that is below a fair market value. A buy-sell agreement might be the solution to prevent this from happening, because it guarantees a buyer for your interest. Size of business interest, estate could make sale difficult The larger the size of your business interest, the more difficult it may be to find a buyer with access to sufficient cash or credit on short notice. In addition, the larger the size of your business relative to your entire estate, the greater the need for cash to settle your estate expenses. Again, transferring your business interest with a buy-sell agreement might help you to solve these potential problems. Smaller business interests are not without their own problems. Buyers may be reluctant to purchase a minority interest because such an interest doesn't carry with it the ability to control the business. Transfer your business interest through lifetime gifts You can transfer your business interest through lifetime gifts by doing just that--making gifts during your lifetime. You can choose to make smaller gifts of portions of your business interest over a period of time or make a gift in total at your retirement. Lifetime gifting reduces the value of your estate and could lower your estate taxes A lifetime gifting program removes the value of the business from your estate as you make gifts to the recipient. The benefit to you is a reduction in the value of your total estate, thus the possibility of lower estate taxes at your death. Not only do you remove the value of the gift itself from your estate, but you also remove the future appreciation on the gift and taxes that would be associated with the gain. Lifetime gifting allows you to take advantage of the annual gift tax exclusion, which may help you reduce total gift and estate taxes You could make gifts of unrestricted stock over a period of time by arranging the gifting program to maximize the annual gift tax exclusion, which allows you to gift up to $13,000 (2009 figure, up from $12,000 in 2008) per donee per year without incurring federal gift tax (although you may have to pay state gift tax). The benefit to you is a tax-free, systematic reduction in the size of your estate. When you make gifts of portions of your stock, you ultimately pay less total gift tax than if you made one large gift, thanks to the valuation discount. Lifetime gifting requires you to give up part or all of your business As you make gifts of your business interest, you might also be giving up some of your ownership control over the business, while the recipient of the gift gains control. If you have co-owners, your relative percentage of control will diminish. If you are the majority stockholder, it might take a long time before you are in a position of See disclaimer on final page September 17, 2009
  • 16. Ameriprise Financial Page 16 of 20 significantly less control. If you hold equal ownership with co-owners, it may not take long before you become a minority shareholder. Transfer your business interest at death through your will or trust If you wish to keep control of your business until your death and transfer your interest to someone at that time, you could transfer your business interest at death through your will or trust. This method of business succession can be effective when the intended receiver of your bequest is currently active in your business and would be able to carry on the business activities. Will provisions can authorize the continuation of your business A will provision can direct the executor of your estate to continue your business for a specified period of time or purpose, thus granting permission to carry out activities that otherwise may not be allowed. If the business is continued, the executor may be held personally liable for losses of the business. Caution should be taken by authorizing the executor to incorporate the business, which may limit liability to the activities of the continued business. After your death, the business can be maintained until your family can take control and continued income from your business can be provided to your family and heirs. With a living trust, you can see your continuation plan in action A living trust would allow you to make a revocable transfer of your business interest, providing you with the opportunity to see your continuation plan in action while you are alive. You can see your successor management operating the business while you are afforded continued control and input. This gives you the chance to be completely satisfied with your decision before it becomes irrevocable at your death. A living trust can provide income to you or your heirs Depending upon the structure of your living trust, you may receive an income from the trust during your retirement until your death. At your death, the business may provide income to your family or heirs or the business can be maintained until your family or heirs can take over. Use of a trust can be efficient and private When you establish a living trust, it requires you to organize your property during your lifetime. In doing so, your assets are transferred at death in an orderly fashion as you intended and not at the discretion of the court. The use of a trust will be less expensive overall, because your assets pass from the trust directly to the people you designate to receive them, avoiding the costly probate court process. This would be considered a private transaction, keeping the transfer free of any publicity. Choosing the right type of succession plan The various succession strategies can be used to achieve specific goals for your business interest. Depending upon your particular situation, one or more of these tools may be appropriate for you. The tricky part is, how do you decide? Take a look at our decision tools which were created to help you analyze and compare the various business succession strategies. Once you have narrowed down your choices, meet with your attorney and tax or financial planner to develop your personal business succession plan. See disclaimer on final page September 17, 2009
  • 17. Ameriprise Financial Page 17 of 20 Planning for Business Succession Checklist General information Yes No N/A 1. Has relevant personal information been gathered? • Personal details • Family details • Name of other participants in the business 2. Has personal financial situation been assessed? • Income • Expenses • Assets • Liabilities 3. If business is a separate entity, has its financial situation been assessed? • Type of entity (e.g., corporation, partnership) • Income • Expenses • Assets • Liabilities • Owners' equity 4. Has professional team been assembled? • Accountant • Attorney • Insurance professional Notes: Business succession planning basics Yes No N/A 1. Are there other owners of the business? 2. Is there a legal, written business succession plan in place? 3. Has a short-term contingency plan been prepared that maps out procedure for the continuation of business operations? 4. Has a successor management team been chosen? 5. Have methods of retaining key employees during transition been discussed? 6. Has plan been discussed with family members and key employees? 7. Has equalizing estate distributions to children been discussed? 8. If no business succession plan is in place, have various strategies and goals been discussed? See disclaimer on final page September 17, 2009
  • 18. Ameriprise Financial Page 18 of 20 Notes: Selling a business interest Yes No N/A 1. Is selling the business to family an option? 2. If selling the business to family is an option, have financing options been considered? • Private annuity • Installment sale • Self-canceling installment note • Buy-sell agreement • Coordinate sale with gifts • Family limited partnership 3. Is selling the business to nonfamily an option? • Selling shares or assets • Using a buy-sell agreement to sell to nonfamily • Selling to another corporation • Selling to an employee stock ownership plan (ESOP) Notes: Lifetime gifting Yes No N/A 1. Has transferring the business with lifetime gifts been considered? • Outright gifts • Trusts • Charitable remainder trusts • Transfer using another entity Notes: Other strategies Yes No N/A 1. Have other transfer strategies been discussed? • Grantor retained trusts • Retained interest See disclaimer on final page September 17, 2009
  • 19. Ameriprise Financial Page 19 of 20 Notes: Buy-sell agreements Yes No N/A 1. Is a buy-sell agreement an option? • Entity purchase • Cross purchase • Wait and see • Section 302 stock redemption • Section 303 stock redemption • One-way • Trusteed cross purchase 2. If a buy-sell agreement is an option, have ways to fund the agreement been discussed? • Life insurance • Disability insurance • Cash • Borrowings Notes: See disclaimer on final page September 17, 2009
  • 20. Page 20 of 20 Ameriprise Financial The information contained in this material is being provided for general education Daniel J. Lensing, CRPC® purposes and with the understanding that it is not intended to be used or interpreted Financial Advisor as specific legal, tax or investment advice. It does not address or account for your 14755 No. Outer Forty individual investor circumstances. Investment decisions should always be made based on your specific financial needs and objectives, goals, time horizon and risk Chesterfield, MO 63017 tolerance. 636-534-2097 daniel.j.lensing@ampf.com The information contained in this communication, including attachments, may be provided to support the marketing of a particular product or service. You cannot rely on this to avoid tax penalties that may be imposed under the Internal Revenue Code. Consult your tax advisor or attorney regarding tax issues specific to your circumstances. Neither Ameriprise Financial Services, Inc. nor any of its employees or representatives are authorized to give legal or tax advice. You are encouraged to seek the guidance of your own personal legal or tax counsel. Ameriprise Financial Services, Inc. Member FINRA and SIPC. The information in this document is provided by a third party and has been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Ameriprise Financial Services, Inc. While the publisher has been diligent in attempting to provide accurate information, the accuracy of the information cannot be guaranteed. Laws and regulations change frequently, and are subject to differing legal interpretations. Accordingly, neither the publisher nor any of its licensees or their distributees shall be liable for any loss or damage caused, or alleged to have been caused, by the use or reliance upon this service. Prepared by Forefield Inc. Copyright 2009 Forefield Inc.