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

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