This document provides an overview of a 7-step succession planning process for business owners. It discusses how creating a succession plan can enhance the value of a business when it is sold, either to employees or a third party. The 7 steps include: identifying exit objectives; assessing business and personal finances; maximizing business value; selling to third parties or employees; ensuring business continuation; and planning for personal wealth and estate issues. Creating a succession plan helps owners meet financial goals through tax planning and incentivizing key employees, while allowing for a smooth transition upon the owner's exit.

1. Succession Plan Executive Briefing
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How Selling A Business Can Be Enhanced
by Creating A Succession Plan
by Joe Rodwell
Exit Planning LLC
www.ExitPlanningMN.com
www.LinkedIn.com/in/JoeRodwell

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“Top Exit Planning Experts from Across the Country”
Joe Rodwell
Exit Planning LLC
(Only entry from Minnesota)
Boomer Market Advisor
January 2007: p. 62

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Why Succession Planning?
Every business owner will sooner or later sell a
business, and very few are adequately prepared.
Exit Planning LLC was founded to help business
owners create a written Succession Plan that will allow
them to sell their businesses, or cut back significantly
from day-to-day operations, under the most favorable
conditions.

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The Seven Step Succession Planning Process™
 Step 1 - Identify Exit Objectives
 Step 2 – Identify Business & Personal Financial Resources
 Step 3 – Maximize and Protect Business Value
 Step 4 - Sale to Third Parties
 Step 5 - Sale to Insiders
 Step 6 - Business Continuation
 Step 7 - Personal Wealth & Estate Planning

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Step 1: Identifying Succession Plan Objectives
“When a man does not know which harbor he is heading
for, no wind is the right wind.” Seneca, 59 B.C.

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Step 1: Identify Succession Plan Objectives
 What is the exact date you plan to sell your business?
 How much money – in cash – will you need each and
every month after you sell your business?
 Who do you want to own the business when you leave?
• Family members
• Other owners or Key Employees
• Third Party

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Step 1: Identify Succession Plan Objectives
Characteristics of a Succession Planning Advisor Team
 Owner selects Team Members
 Demand experience in Succession Planning
 Coordinated planning and action is key
 Team members willing to work together
 Owner’s Road Map is a written Succession Plan
 Action Checklist is a guide for Advisor Team

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Step 2: Identify Business & Personal Financial Resources
“Knowing where you are . . . helps map the destination.”

9. Succession Plan Executive Briefing
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Step 2: Identify Business & Personal Financial Resources
What Is Your Business Worth?
You must know the value, because to sell the business, you
will need cash - from the business, and the business is
generally the owner’s most valuable asset.
The owner and advisors need to know the current value of
the business to determine if the owner’s financial objectives
can be met at the present time.

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Step 2: Identify Business & Personal Financial Resources
The value of a business is based upon the perspective of the
person valuing it and the reason for the value.
Maximum Value, also called Enterprise Value, is what

most owners want to receive from sale to a third party.
Minimum Value, after applying a variety of legitimate
valuation discounts, then called Lowest Defensible Value, is
what most owners should choose to receive from Insiders
for their ownership interest, which would not reflect the
total value that they receive for sale of the business.

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Step 3: Maximize and Protect Business Value
“From Good to Great.”

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Step 3: Maximize and Protect Business Value
Three Components
1. Preserve value from needless taxation
3. Protect value from creditors
4. Maximize value through Value Drivers

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Step 3: Maximize and Protect Business Value
Benefits to Owner:
 Reduce income taxes upon sale by 25 - 100%
vs. no planning
 Create ability to sell the business
 Protect assets from potential business and
personal creditors.
 Increase business value and pre-tax earnings
 Motivate and retain Key Employees

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Step 3: Maximize and Protect Business Value
Methods to Minimize Taxes
• Charitable Remainder Trusts (CRTs)
• Use of “lowest defensible value”
• Choice of entity: C versus S corporation
• Creation of multiple entities
• Employee Stock Ownership Plans (ESOPs)
• Qualified Plan Redesign

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“C” vs. “S” Asset Sale Comparison
Fair Market Value = $4,000,000
Basis of Assets = $1,000,000
Entity Status Corporate Tax Personal Tax Net Proceeds to Owner
“C” Corp $1,200,000 $550,000 $2,250,000
“S” Corp $0 $600,000 $3,400,000

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Step 3: Maximize Value Through Value Drivers
 Focus on before-tax earnings that reflect future income growth
 Develop operating systems that sustain before-tax earnings
 Document sustainability of before –tax earnings (EBITDA)
 Improve company performance measured by industry metrics
 Update facilities, equipment, and systems to state-of-the-art
 Pay down debt, manage inventories-recognize obsolete items
 Solidify and diversify customer base
 Implement strategies to grow the company
 Build a solid management team - incent team to perform.

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Step 3: Maximize and Protect Business Value
The Role of Key Employees
 Indispensable components of a valuable business are its top
employees.
 Think about it – they are even more valuable than you are for
purposes of creating value for your business.
 Why? Because the more valuable you are to the business, the
less value the business has when you leave it. So if you want to
make your business more valuable, make yourself less valuable.
 .

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Step 3: Maximize and Protect Business Value
Design of Incentive Plan
 Increase profitability
 Increase business value
 Retain key employees
 Must contain a deferral – the retention of the key employee.

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Step 4: Sale to Third Parties
“The ideal path for many owners.”

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Step 4: Sale to Third Parties
Benefits to Owner
 Cash
 Minimize financial risk of exit
 Eliminate family succession issues
 Quicker exit possible?

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Step 4: Sale to Third Parties
The primary factors in determining what a buyer is
willing to pay you for your business:
 Future earnings before taxes that he/she expects to realize
from the business (EBITDA) – most businesses are sold as a
multiple of EBITDA.
 The buyer wants to know the quality of your management
team and whether they will remain when you leave.

The current and future state of your industry.

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Step 4: Sale to Third Parties
 Maximum value is normally obtained when the business’s
future looks the brightest and when market conditions are
peaking, even though the owner may not be ready to sell.
 Never state an asking price.
 Sell through a competitive auctioning process involving
multiple prospective buyers through business brokering.

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Step 5: Sale to Insiders
“How to structure the transaction.”

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Step 5: Sale to Insiders
The Issues are Similar:
 Taxes
 Money: children, other owners, key
employees have no money, so most of
the purchase must come from the
future earnings of the company.

25. Succession Plan Executive Briefing
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TAXES: Golf Unlimited, Inc.
Sale for MAXIMUM Value
Determined by Your Appraiser
$1,000,000
Cash Flow = $1,700,000
BUYER SELLER
$1,000,000
$1,700,000
-200,000 CAPITAL GAINS TAX
-700,000 INCOME TAX
$ 800,000
$1,000,000
PAYMENT FOR BUSINESS
Conclusion: Few businesses can be successfully transferred
when the IRS gets 50% or more of the available proceeds!

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Step 5: Sale to Insiders
So What’s the Answer?
Devise methods to maximize your income stream by
minimizing taxation and preserve value from needless
taxation.
Thus, you will need ordinarily to sell your ownership
interest for the lowest (yes, lowest) defensible value.
Then, obtain the income you need without subjecting the
business net earnings to the double tax.

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TAXES: Golf Unlimited, Inc.
Sale for MINIMUM Value
Determined by Your Appraiser
Discounted Value = $300,000
+ NQ Deferred Compensation
BUYER SELLER
$450,000 Cash Flow $300,000 + 835,000 NQDC
-150,000 Income Tax - 60,000 Tax – 275,000
$300,000 $240,000 + $560,000
PAYMENT FOR BUSINESS $800,000

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Comparison of Enterprise and Discounted Values
How Valuation Methods Impact Cash Flow Requirements
Maximum Value Minimum Value
Sale for:
Sale for: $1,000,000 $300,000
Requires: Requires:
Cash Flow $1,700,000 Cash Flow $450,000
Plus
Required Cash Flow $1,700,000 Deductible business NQDC $835,000
Required Cash Flow $1, 285,000

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Step 5: Sale to Insiders
Additional Methods of Receiving Income:
If Real Estate is owned in another entity, lease payments
of the highest defensible amount between that entity and
the business (could be building as well as equipment)
 Consulting Fees
 Sub-S Distributions
 Redesigned Qualified Plan Funding

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Step 6: Business Continuation
“Making sure the business continues
when the owner doesn’t.”

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Step 6: Business Continuation
The Continuation Agreement Controls the Transfer of
Ownership when the Following Events Occur:
Death of an Owner
Permanent Incapacity (Total Disability) of an Owner
Retirement – you need cash to buy out an older owners
Termination of Employment
Bankruptcy

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Step 6: Business Continuation
The Continuation Agreement controls the Transfer of
Ownership When the Following Events Occur:
Divorce – you or your children
Business Disputes Among Owners
When a triggering event occurs, parties may become
adverse.

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Step 6: Business Continuation
Common Buy-Sell Agreement Problems
 Valuation not reviewed regularly (or at all)
 Value not clearly defined
 Difference for “Enterprise Value” not addressed
 Failure to cover all transfer events
 No coordination of life insurance with value
 Disability buy-sell coverage not addressed

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Step 7: Personal Wealth & Estate Planning
“When the ‘slings and arrows’ of outrageous fortune befall
you, fight back.” William Shakespeare (Hamlet)

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Step 7: Personal Wealth & Estate Planning
Benefits to Owners
Financial Security for Family
Treat Children Equitably, Not Equally
Address Estate Taxes
Complete New Estate Plan to Go with Exit Plan
Finalize Retirement Plan

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Conclusion
There is only one way you, as an owner, can leave your
business successfully – you must create a written Succession
Plan as early as possible, revise it occasionally, and stick to the
plan as long as you maintain your business.
Creating and implementing your Succession Plan can be the
most important business and financial event in your life.
Remember, you have only one chance to get it right!
Financial Professionals, like us, bring to the table knowledge
and experience to help you create a written Succession Plan
and help you get it right.

37. Succession Plan Executive Briefing
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Ingredients of a Successful Sale
 A written Succession 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.