Looking Ahead Seminar

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Successful Exit Strategies for Business Owners

Successful Exit Strategies for Business Owners

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  • in his book, "The Seven Habits of Successful Living.”
  • Death: The issue of the death of a small business owner should be considered during the start-up of a business. Unfortunately, during the creation of many buy/sell agreements the issue of death is only addressed at the urging of a life insurance agent. At the meeting, you arbitrarily decide how much insurance you can afford and how much your company is worth, when in fact you do not know.Disability: Death is not as likely to end the business relationship as disability. Small business survival will often take prescient over paying a disabled partner. If the person is important to the business, the financial strain impacts the business and the family who depends on the income.Divorce: You can imagine the torn feelings if a disability occurs, but what if the partners cannot get along? How do we split a partnership without financially ruining each other? It may be complicated by many personalities, some may not even be a part of the dispute, yet may be affected financially.Departure: You may all be happy working together, but your partner or you may decide to leave for another opportunity or simply to take life easier. Who is going to do the work? What is owed the leaving partner? Where is the money coming from? All important considerations for your business exit strategy.
  • For the small business owner, each one of the four D’s has special demands on: family, income, taxes, and transfer of control of assets. An agreement, commonly called buy/sell agreements, can be used to handle the four D's. The concern of the family or income can conflict with the business. The business exists as a separate entity. Reduce conflict by developing mutual fair agreements and the desired level of incomeconsider incorporating your small business to legally recognize yourself and your business as separate entitiesfind a method of determining the value of the corporation that can be done at least annually and will qualify under IRS standardsdevelop an employee benefit plan that will assist with the departure of each partner in case of death, disability, or retirementplan for who retains company ownership and who gets paid offThe great American dream is to: build a business of your own; bring it to life; and make it successful. How you plan your small business exit strategy will determine your financial success. Just as building a successful business takes planning, hard work, and a little luck, so does leaving it.
  • Even with a comprehensive business exit plan in place, things can go wrong. The owner could become physically or mentally disabled, a key employee could leave or die, or a fire or hurricane could completely destroy the business. Planning for these and other types of unexpected situations should be built right into every business exit plan. Things the owner should consider as part of a contingency plan include buy-sell agreements, key employee incentive programs, and purchasing business, disability, and life insurance.
  • Once the owner has both a comprehensive business exit plan and a contingency strategy in place, the owner will be able to focus on their overall estate planning goals. Much of the estate plan may be tied directly to the sale of the business if it is to be sold to one or more family members, and this, in turn, will have a significant impact on the owner's estate plan. On the other hand, once the business is actually sold, the owner's financial position and holdings will change drastically from what they were while the owner still owned the business. Therefore, the owner must look at their estate plan at each and every phase of the business exit plan and update their estate plan accordingly.
  • With the $5,000,000, and with low interest rates, now is a great time to gift using the tools discussed here.

Transcript

  • 1. © 2011
  • 2. Business Facts Quiz
    Why Is Exit Planning
    So Important?
    Presented By:
    Richard Stopa
    Calder Associates
    2
  • 3. Business Facts Quiz
    3
  • 4. Business Quiz Answers
    65% of Business Owners Don’t Know the Value of Their Business
    85% of Business Owners Don’t Have an Exit Plan
    Majority of Business Owner’s Total Assets are Tied up in their Company
    Do You Fit Into One of These Categories?
    4
  • 5. 12 Million
    Estimated Number of Privately Held
    Businesses Owned By Baby Boomers
    Why is this important to even
    non-baby boomers?
    Competition For Business Buyers
    The Boomer Effect
    5
  • 6. The Reality
    25% Privately Held Businesses That Are
    “For Sale” That Actually Sell
    Privately Held Business With Sales of $500K to $25M
    6
  • 7. Why?
    Why Only 25%?
    Unrealistic Expectations
    Business Isn’t Marketable
    Lack of Expert Advice
    No Concrete Exit Plan
    7
  • 8. What Buyers Look For?
    aka: “Value Drivers”
    Verifiable financial statements
    On-going and sufficient cash flow
    Recurring revenue
    Quality reputation
    Proper operational controls and IT infrastructure
    Solid key management and well-trained employees
    8
  • 9. What Buyers Look For?
    Customer/supplier contracts
    Established customers and sales in pipeline
    Established suppliers and credit
    Existing licenses, permits and intellectual property
    Training and support by the seller, post closing
    Existing location
    9
  • 10. Valuing A Business
    Common Methods to Value a Business
    Valuation Based Upon Cash Flow
    Market Method
    Asset Method
    10
  • 11. The Multiple Game
    Why Plan Your Exit Strategy Now?
    Create future value for yourself
    Play the multiple game – turn one dollar
    into three, four or five!!!!
    11
  • 12. Typical Transaction Process
    Months 1–2: Planning
    Months 2–6: Searching
    Months 6–7: Deal Making
    Months 7–9: Closing
    Month 10: A tropical island….
    12
  • 13. Your Advisory Team
    13
  • 14. Sale Considerations
    Presented By:
    Joe Mastaler, CPA
    Witt Mares, PLC
    14
  • 15. Your Silent Partner
    The governments
    Run the numbers
    Capital gains versus ordinary income on an individual level
    Personal income versus capital gains
    15
  • 16. Understanding What You Are Selling
    Stock
    Know your basis
    Ownership interests
    Assets
    Identifiable and agree on the assets selling
    Know your basis and the tax treatment
    Include patents, trademarks and/or copyrights or keep and receive royalty fees
    Intangible
    Purchase price above the fair market value of assets sold
    Goodwill and going concern
    Non-compete agreements
    16
  • 17. Business Entity Type
    Sole Proprietorship
    Partnerships/Limited Liability Entities
    Corporations
    "S" Corporations
    "C" Corporations
    Most tax disadvantage on the sale so planning is important
    Double taxation possible
    Deferred compensation payouts
    17
  • 18. Competing Interest Between The Buyer & Seller
    Buyers generally want to buy assets
    Sellers want to sell stock
    18
  • 19. Does Less Mean More?Tax Impact Of The Sale
    Structure of transaction could mean more cash for a lesser sales price
    Allocation of purchase price
    Agree to an allocation
    Reporting requirements
    19
  • 20. Considerations
    Consider the sale of a part of the business
    20
  • 21. Timing Of The Exit
    21
  • 22. Accounting & Tax Preparation For Successful Exiting
    Financial statements and tax return filings are up to date and timely
    Type of financial statements (Compiled, reviewed or audited)
    If none of these, possible less value obtained
    All tax returns (federal, state, local, business license, property, payroll)
    22
  • 23. Accounting & Tax Preparation For Successful Exiting
    Know your financial information
    Be able to produce what a buyer asked for quickly and accurately
    What is recorded (on the balance sheet and income statement) and what is not (contingent)
    Have list of assets (furniture, equipment, inventory, real estate) and leases commitments prepared in advance
    Expect a buyer to perform due diligence procedures
    23
  • 24. Ways/Methods Of Sale
    Cash
    Exchange
    Some combination
    Installment
    Watch out for the traps if any
    Risk of receiving the total sales price
    Earnouts
    Usually based on the future success of the business but may bring a higher overall price
    Gifting
    ESOPs
    24
  • 25. Have An Idea Of The Value Of Your Business
    Business appraisals
    Asset appraisals
    25
  • 26. Preparing for
    Due Diligence
    Presented By:
    Kevin Learned, Esq.
    General Counsel, PC
    26
  • 27. Preparing For Due Diligence
    Don’t Wait for the Buyer
    Accounting
    Taxes
    State Registrations
    Ownership
    Governance
    Contracts
    Affiliated Transactions
    Employees/Contractors
    Intellectual Property
    Contingent Liabilities
    27
  • 28. Accounting
    Balance the Books
    Accounting Systems and Controls
    Audited Financials
    Buyers Will Require
    Identify and Resolve Issues
    Through Recent Calendar Quarter
    Consider Auditing up to Three Years Back
    Be Prepared for Recent Financials to be Reviewed
    Track Normalization Adjustments
    28
  • 29. Taxes
    Get Current with Uncle Sam
    Income
    Sales and Use
    Employee/Payroll
    Property
    Franchise
    29
  • 30. State Registrations
    Are You Qualified?
    Obtain a Good Standing Certificate
    Place of Formation
    Other States where Qualified
    Qualify Where Doing Business
    Location of Contract Performance
    Generating Sales/Income
    Generally, Not Mere Solicitation
    30
  • 31. Ownership
    Avoid Loose Ends
    Update Stock Ledger and Cap Table
    Document All Equity Issuances and Transfers
    Document All Incentive Compensation
    Clean-up Unwanted Transactions
    Transfers in Violation of S Corp Restrictions
    Issuances With Negative Tax Implications
    Transfers/Issuances in Violation of 51% Ownership Requirements
    31
  • 32. Governance
    You Are Selling a Real Company
    Make Sure Your Organization Documents are Updated
    Conduct Regular Board Meetings
    Conduct Annual Shareholder Meetings
    Adopt Current Resolutions Appointing Directors and Officers
    32
  • 33. Contracts
    Is Everything Updated?
    Are Expired Contracts Continuing?
    Amendments, Work Orders, Etc.
    Identify Contracts that Require Notice or Consent
    Identify Contracts With Other Transfer Restrictions
    Set-aside Restrictions
    Contracts Currently Being Negotiated
    Look Ahead to a Sale
    Terminated Contracts
    33
  • 34. Affiliated Transactions
    Keep Everything Separate
    Document Agreements Between the Company and Owners or Affiliates
    Loans
    Leases/Subleases
    Shared Services
    Intercompany Transfers
    De-Personalize the Company
    34
  • 35. Employees/Contractors
    Lock Down Your Team
    Employment Agreements with Key Employees
    Non-competition and Non-solicitation Provisions
    Change of Control Bonuses
    Incentivize Employees to Stay With the Company
    Limit Concerns With the Transition
    Keep Focus on Business Operations
    Well-drafted Independent Contractor Agreements
    Human Resources/Immigration Audit
    35
  • 36. Intellectual Property
    Do You Own It?
    Work for Hire
    Assignment of Inventions
    Patents
    Trademarks
    IP Audit
    36
  • 37. Contingent Liabilities
    Resolve Disputes
    Pending or Threatened Litigation
    Engage Competent Counsel
    Determine Amount in Dispute
    37
  • 38. Purchase & Sale
    Documents
    38
  • 39. Purchase & Sale Documents
    Getting to a Deal
    Indication of Interest
    Nondisclosure Agreement
    Diligence Request List
    Letter/Memorandum of Intent
    Purchase/Merger Agreement
    Disclosure Schedules
    Exhibits
    39
  • 40. Purchase & Sale Documents
    Closing the Deal
    Purchase/Merger Agreement
    Promissory Note and Security Agreement
    Escrow Agreement
    Employment/Consulting Agreement
    Non-competition and Non-solicitation Agreement
    Other Ancillary Agreements and Documents
    40
  • 41. From the Bank’s Perspective
    Presented By:
    Andy Kalin
    Access National Bank
    41
  • 42. Two Sides To Every Transaction
    Buyer Qualifications
    Show Me the Money
    Financial Capacity (bank reference, financials)
    Capable of Running the Business
  • 43. Two Sides To Every Transaction
    Seller Financials/Value Drivers
    Business Records
    Financial Records (tax returns, audited)
    Valuations/Appraisals
    Revised Business Plan
    (value guidance)
    Leases/Contracts
    Assignable (affects type of sale)
  • 44. Payment Terms – Dictate Price
    Cash = lower price
    Seller Financing/Earn Out
    Protects the Buyer
    Banks Like
    Potential Tax Benefit
    Bank Financing
    Prefer Some Seller Financing or Earn out
    Subordination
    SBA
    Stand Still on Seller Financing
    No Earn Out
  • 45. Exit Strategies
    Presented By:Max Barger, Esq.General Counsel, PC
    45
  • 46. Exit Strategies
    "Begin with the end in mind“
    Stephen Covey
    Plan before you want to sell
    Grooming the successor
    Identifying key employees
    Defining what a buy-out looks like at retirement
    46
  • 47. Exit Strategies
    The 4 D’s of a business exit
    Death
    Disability
    Divorce
    Departure
    47
  • 48. Exit Strategies
    The Buy-Sell Agreement
    Determine the value of your company
    Develop an employee benefit plan that will assist with you (or your partners’) departure
    Plan who retains ownership and who gets paid off
    Put a time line in place
    48
  • 49. Exit Strategies
    Create a contingency plan
    Fund your plan
    How do you pay for the 4 D’s
    Life Insurance
    Disability Insurance
    Agree on how to determine selling price
    Financing
    49
  • 50. Exit Strategies
    Where planning to sell your business and estate planning meet
    50
  • 51. Promissory Note
    Sale
    Valid
    Appraisal
    Beneficiaries
    Sale to a Defective Trust
    Business Owners
    IDGT
    Gift
    Gift matures
    for 60+ days
  • 52. Beneficiaries
    Valid
    Appraisal
    Grantor Retained Annuity Trust
    Business Owners
    Annuity
    GRAT
    Gift
    Transfer
  • 53. Promissory Note
    Valid
    Appraisal
    Installment Sales
    Business Owners
    Children-Purchasers
    Sale
    Value of
    Installment Note
    remains in your estate
    Installment Note
    cancels
    at your deaths
  • 54. Asset Protection Trusts
    Duress
    Asset Protection Trust
    Control
    Grantors
    Beneficial Enjoyment
    Trustee
    54
  • 55. Quick Update on Estate Tax
    $5,000,000 Federal gift and estate exemption
    Unified system
    Top rate of 35%
    Sunsets at the end of 2012
    Back to $1,000,000
    Top rate of 55%
    Annual gift tax exclusion is $13,000
    55
  • 56. Case Studies
    56
  • 57. Case Study #1 (Retail Furniture Business)
    Sells furniture direct to consumers and businesses
    S Corporation, owned 50/50 by husband and wife
    Husband and wife are close to retirement age
    One adult child actively involved in the business
    Two other adult children not involved in the business
    Stable annual revenue of $8-10 million for the past several years
    Owners’ net income from salary and distributions of approximately 10% of revenues
    Owners want to retire and move to Florida
    Have been in business for over 30 years
    57
  • 58. Case Study #1 (Retail Furniture Business)
    Single retail location
    Also rents warehouse space for excess inventory
    Real property owned in a separate LLC
    Owned 50/50 by the husband and wife
    Key contracts in place with suppliers
    Key employees
    Manager (son of husband and wife)
    Marketing/Sales director
    Warehouse manager
    Bookkeeper (wife)
    $1 million SBA loan in place
    58
  • 59. Case Study #2 (Architectural Services Business)
    Provides architectural services to commercial and government customers
    LLC, owned 50/35/15 by three unrelated owners
    15% owner developed software for the company and is not currently involved in day-to-day operations
    Growing annual revenue
    $4 million in 2009
    $5 million in 2010
    $7 million projected for 2011
    Owners’ net income from salary and distributions of approximately 20% of revenues
    Owners want to cash out and move to the next project
    35% owner willing to stay on post-sale
    59
  • 60. Case Study #2 (Architectural Services Business)
    Leased office space in a single location
    60% of revenue from commercial customers; 40% of revenue from government customers
    Ten percent of revenue from a single federal subcontract
    Key employees
    50% owner generated most of the client relationships, but is not as active in the day-to-day operations
    35% owner manages day-to-day operations
    Operating Agreement in place includes non-competition and non-solicitation provisions
    $500K line of credit in place
    401K plan in place
    60
  • 61. Thank you for
    joining us today.
    61