The Seven Step Selection Planning Process

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Planning to sell your business can be overwhelming when considering the broad range of issues and advisors with whom you will be working. At Exit Planning LLC we follow the Seven Step Exit Planning Process™ developed by the Business Enterprise Institute. This process revolves around your objectives in selling your business and aligns current and future advisors to these objectives.

The Seven Step Succession Planning Process™ is summarized in this powerpoint presentation.

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  • © 2004 Business Enterprise Institute, Inc.
  • © 2004 Business Enterprise Institute, Inc.
  • © 2004 Business Enterprise Institute, Inc.
  • © 2004 Business Enterprise Institute, Inc.
  • © 2004 Business Enterprise Institute, Inc.
  • © 2004 Business Enterprise Institute, Inc.
  • © 2004 Business Enterprise Institute, Inc.
  • © 2004 Business Enterprise Institute, Inc.
  • © 2004 Business Enterprise Institute, Inc.
  • © 2004 Business Enterprise Institute, Inc.
  • © 2004 Business Enterprise Institute, Inc.
  • © 2004 Business Enterprise Institute, Inc.
  • © 2004 Business Enterprise Institute, Inc.
  • © 2004 Business Enterprise Institute, Inc.
  • © 2004 Business Enterprise Institute, Inc.
  • © 2004 Business Enterprise Institute, Inc.
  • © 2004 Business Enterprise Institute, Inc.
  • © 2004 Business Enterprise Institute, Inc.
  • © 2004 Business Enterprise Institute, Inc.
  • © 2004 Business Enterprise Institute, Inc.
  • © 2004 Business Enterprise Institute, Inc.
  • © 2004 Business Enterprise Institute, Inc.
  • © 2004 Business Enterprise Institute, Inc.
  • © 2004 Business Enterprise Institute, Inc.
  • © 2004 Business Enterprise Institute, Inc.
  • © 2004 Business Enterprise Institute, Inc.
  • © 2004 Business Enterprise Institute, Inc.
  • © 2004 Business Enterprise Institute, Inc.
  • © 2004 Business Enterprise Institute, Inc.
  • © 2004 Business Enterprise Institute, Inc.
  • © 2004 Business Enterprise Institute, Inc.
  • © 2004 Business Enterprise Institute, Inc.
  • © 2004 Business Enterprise Institute, Inc.
  • © 2004 Business Enterprise Institute, Inc.
  • © 2004 Business Enterprise Institute, Inc.
  • © 2004 Business Enterprise Institute, Inc.
  • © 2004 Business Enterprise Institute, Inc.
  • The Seven Step Selection Planning Process

    1. 1. Succession Plan Executive BriefingOverview Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 Conclusion 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
    2. 2. Succession Plan Executive BriefingOverview Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 Conclusion “Top Exit Planning Experts from Across the Country” Joe Rodwell Exit Planning LLC (Only entry from Minnesota) Boomer Market Advisor January 2007: p. 62
    3. 3. Succession Plan Executive BriefingOverview Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 Conclusion 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.
    4. 4. Succession Plan Executive BriefingOverview Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 Conclusion 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
    5. 5. Succession Plan Executive BriefingOverview Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 Conclusion 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.
    6. 6. Succession Plan Executive BriefingOverview Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 Conclusion 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
    7. 7. Succession Plan Executive BriefingOverview Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 Conclusion 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
    8. 8. Succession Plan Executive BriefingOverview Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 Conclusion Step 2: Identify Business & Personal Financial Resources “Knowing where you are . . . helps map the destination.”
    9. 9. Succession Plan Executive BriefingOverview Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 Conclusion 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.
    10. 10. Succession Plan Executive BriefingOverview Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 Conclusion 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.
    11. 11. Succession Plan Executive BriefingOverview Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 Conclusion Step 3: Maximize and Protect Business Value “From Good to Great.”
    12. 12. Succession Plan Executive BriefingOverview Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 Conclusion 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
    13. 13. Succession Plan Executive BriefingOverview Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 Conclusion 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
    14. 14. Succession Plan Executive BriefingOverview Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 Conclusion 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
    15. 15. Succession Plan Executive BriefingOverview Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 Conclusion “C” vs. “S” Asset Sale Comparison Fair Market Value = $4,000,000 Basis of Assets = $1,000,000Entity 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
    16. 16. Succession Plan Executive BriefingOverview Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 Conclusion 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.
    17. 17. Succession Plan Executive BriefingOverview Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 Conclusion 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.  .
    18. 18. Succession Plan Executive BriefingOverview Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 Conclusion 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.
    19. 19. Succession Plan Executive BriefingOverview Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 Conclusion Step 4: Sale to Third Parties“The ideal path for many owners.”
    20. 20. Succession Plan Executive BriefingOverview Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 Conclusion Step 4: Sale to Third Parties Benefits to Owner  Cash  Minimize financial risk of exit  Eliminate family succession issues  Quicker exit possible?
    21. 21. Succession Plan Executive BriefingOverview Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 Conclusion 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.
    22. 22. Succession Plan Executive BriefingOverview Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 Conclusion 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.
    23. 23. Succession Plan Executive BriefingOverview Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 ConclusionStep 5: Sale to Insiders “How to structure the transaction.”
    24. 24. Succession Plan Executive BriefingOverview Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 ConclusionStep 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. 25. Succession Plan Executive BriefingOverview Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 Conclusion 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!
    26. 26. Succession Plan Executive BriefingOverview Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 ConclusionStep 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.
    27. 27. Succession Plan Executive BriefingOverview Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 Conclusion 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
    28. 28. Succession Plan Executive BriefingOverview Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 Conclusion 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
    29. 29. Succession Plan Executive BriefingOverview Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 ConclusionStep 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
    30. 30. Succession Plan Executive BriefingOverview Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 Conclusion Step 6: Business Continuation“Making sure the business continues when the owner doesn’t.”
    31. 31. Succession Plan Executive BriefingOverview Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 Conclusion 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
    32. 32. Succession Plan Executive BriefingOverview Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 Conclusion 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.
    33. 33. Succession Plan Executive BriefingOverview Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 Conclusion 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
    34. 34. Succession Plan Executive BriefingOverview Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 Conclusion Step 7: Personal Wealth & Estate Planning “When the ‘slings and arrows’ of outrageous fortune befall you, fight back.” William Shakespeare (Hamlet)
    35. 35. Succession Plan Executive BriefingOverview Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 Conclusion 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
    36. 36. Succession Plan Executive BriefingOverview Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 Conclusion 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. 37. Succession Plan Executive BriefingOverview Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 Conclusion 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.

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