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Strategic Transition Planning - Applying Proven Techniques


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Decosimo's Bob Wheat presented this PowerPoint at the 2012 Decoimo Tax Seminar held October 31, 2012 in Chattanooga, Tennessee.

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Strategic Transition Planning - Applying Proven Techniques

  1. 1. A Global Reach with a Local Perspective www.decosimo.comStrategic Transition Planning ApplyingProven TechniquesBOB WHEAT, CPA, J.D., AEP® | Senior Tax Manager
  2. 2. Why Strategic Transition PlanningYour Business Is Your Future…Most owners...• Want to leave their businesses in the next 5-10 years.• Will never be able to leave their businesses in style.• Have no plan to grow value or to exit their businesses.• Work in, not on, their businesses.
  3. 3. Why Business Exit PlanningYour Business Is Your Future…Few owners know:• The amount of post-retirement income they need/want.• The value of their largest asset.• The amount of investment capital they need to create their desired retirement income. This is the starting point.
  4. 4. Why Business Value and Exit PlanningWhy Build Business Value?As Michael E. Gerber wrote in The E-Myth Revisited: WhyMost Small Businesses Don’t Work and What to Do AboutIt:“…there is ultimately only one reason to create a business of your own, and that is to sell it!” (pg. 152)
  5. 5. Case StudyYour Business Is Your FutureDetermine first the amount of retirement income you want/need.Let’s meet Peter and Pam. • Peter is 58 and wants to exit by age 63. • Their Joint Life Expectancy is age ___. • They plan on having $500,000 of non-business investment assets in five years. • Peter and Pam’s annual income from their business is $250,000.
  6. 6. Case StudyMeet Peter and Pam• Annual Income Amount: Peter assumed that he and Pam could liveon 50 percent of their current income. Pam, however, did not want tocut back that drastically and found that the editors of Money Magazineagreed: “. . . . youll need 70% of your pre-retirement yearly salary to live comfortably. That might be enough if youve paid off your mortgage and are in excellent health when you kiss the office good-bye. But if you plan to build your dream house, trot around the globe, or get that Ph.D. in philosophy youve always wanted, you may need 100% of your annual income – or more.” .htm.
  7. 7. Case StudyAssumptions and Approach• Personal Financial Needs Projection: Peter and Pam need$200,000 per year for approximately 30 years.• Quantify Resources/Estimate of Business Value: The business isestimated to be worth today between $1,000,000 and $1,500,000. Also,Peter and Pam will have approximately $500,000 in investable assets atretirement.• The Gap: Peter’s advisor calculated that the amount of investmentcapital needed to pay Peter and Pam $200,000 per year for the duration oftheir lives is approximately $3,000,000.• The net (after tax) sale proceeds from the sale of the business must be$2,500,000 – or about $3,000,000 to $3,500,000 pre-tax.
  8. 8. Case StudyThe Gap:• The gap between what Peter has today and what he needs to retireon his terms is about $2,000,000. Peter must increase the value of thecompany by at least $2,000,000 if he is to exit on his terms.• This is why Peter needs at least five years to build the value of hisbusiness and why he must start now.
  9. 9. Your Next StepBuild Business ValueRather than tackle the entire process, let’s commit to do only twothings: – Break your distant goal of exiting your company in style into manageable goals, based on growing business value. – Create a list of small action steps for each goal with deadlines that, when put together, are the beginnings of the road map to your exit.
  10. 10. Manageable GoalsGoal One: Set Ownership Objectives• As Yogi Berra said: “Youve got to be very careful if you dont know where youre going, because you might not get there.”• Setting your ownership objectives is about fixing yourtarget or describing what a successful exit looks like to you.
  11. 11. Manageable GoalsGoal Two: Quantify Your Resources• What are your current personal assets? (Stocks, Bonds,Executive Benefit Plans, etc.)• How much cash will you need from the sale of thecompany to enjoy a financially secure post business life?
  12. 12. Manageable GoalsGoal Three: Close The GAPSample Recommendations:  Good and improving cash flow. A stable, motivated team of key employees.  Removing YOU from the business. Operating systems that improve  Intellectual Property identification sustainability of cash flows. and protection. A solid, diversified customer base.  Systems to make business decisions (for employees) A realistic growth strategy.  Paying down debt Effective financial controls.
  13. 13. Next StepsComplete Value Driver Analysis• It is complimentary.• Includes 16 Questions (1=Not Important – 5=Critical)• Result: – Visual assessment that shows you the areas in which your company is well-positioned to grow value and the areas where it needs work.
  14. 14. Value Driver Analysis Brochure
  15. 15. Value Driver Analysis BrochureThis Value Driver Analysis will focus on:• Identifying your Strategic Objectives.• Determining your current personal and business financial resources.• The specific areas in your business that you need to focus on to close thegap.
  16. 16. The Value Driver Analysis Brochure Result
  17. 17. Value Driver Analysis BrochureStrategic Objectives (Page 4)1. Have you established the date (ex. January 15, 2015) that you wish to stopworking in and for your business?2. Do you know how much money you may need, annually, after you leaveyour business to live a comfortable post-business life?3. Have you chosen your exit path and/or successor?
  18. 18. Value Driver Analysis BrochureQuantifying Resources (Page 5)1. Do you have strategies in place to increase your company’s current cashflow?2. Do you know what value you will need from your business to meet yourfinancial objectives?3. Do you know what income your personal financial assets will likely generatebeginning on your planned business exit/retirement date?
  19. 19. Value Driver Analysis BrochureClosing The GAP (page 6)1. Statement: Successful owners understand how to exploit their companies’ future businessopportunities. They use written business plans to relentlessly pursue their goals and clearlycommunicate to all employees how their actions and responsibilities contribute to thecompany’s performance. Question: Does your company have a similar approach and business plan?2. Statement: Owners of best-of-the-best companies act swiftly to minimize or eliminate themajor threats and risks to their businesses. Threats include: loss of key employees, tradesecrets, proprietary information/technology and key customers, as well as competitive risksarising from the development of new technologies. Question: Have you assessed and addressed all threats facing your company?3. Statement: Buyers look for and pay well for companies with motivated and longstanding keyemployees. Unless key employees are able to run the business without the owner, thecompany is neither sustainable nor saleable to a third party buyer, to employees or to theowner’s children. Question: Can your key management team run your company in your absence?
  20. 20. Value Driver Analysis BrochureClosing The GAP (Page 6)4. Statement: Failing to anticipate the income tax consequences you will incur upon the sale of yourcompany can result in a tax liability that will force you to stay at the helm years longer than youanticipated. Best-of-the-best company owners begin tax minimization planning years before theytransfer or sell their ownership. Question: Have you done everything legally possible to minimize the taxes you’ll pay when youleave your company?5. Statement: A key component in the success of any business is its development and use of efficientoperating systems, processes and procedures such as: marketing, human resources, production,sales, lead generation, financial systems, and customer service. Without systems, a business cannotexpand effectively and cannot operate without its owner. Question: Does your company have the systems necessary for a successor owner to operate itsuccessfully?6. Statement: Successful businesses are financially strong and their owners constantly monitor timelyand accurate financial controls. Without controls and review it is impossible to maximize cash flow,minimize expenses or develop and implement a plan to grow company value. Question: Do you understand and constantly use your company’s financial information to improveperformance and cash flow?
  21. 21. The ProcessHow We Work With You• Value Driver Analysis – Done! – Visual assessment that that shows you the areas in which your company is well-positioned to grow value and the areas where it needs work.• Review Value Driver Analysis – We will set up a Web conference and discuss the next steps. • Create Value Driver Report (paid engagement). • Ultimately develop and implement comprehensive Exit Plan.
  22. 22. Thank YouJ. Robert Wheat, Jr., JD, CPA, AEP ® Decosimo 423-756-7100
  23. 23. The Value To You Time is Ticking…Current Financial Desired Financial Resources Resources How Large Is Your GAP?