Exit Planning for Privately Held Business Owners: Myths, Truths, and the Dirty Reality

1. 1
Exit Planning for the Privately
Held Business Owner
Myths, Truths, & the Dirty Reality
SF ACG
March 17, 2011
Matt Roberson and Derek Ferriera are registered representatives of Lincoln Financial Advisors Corp.
Securities offered through Lincoln Financial Advisors Corp., a broker-dealer (member SIPC). Investment advisory
services offered through Sagemark Consulting, a division of Lincoln Financial Advisors Corp., a registered
investment advisor. Insurance offered through Lincoln Marketing and Insurance Agency, LLC and Lincoln
Associates Insurance Agency, Inc. and other fine companies.
CRN
Mark Gould is not a registered representative of Lincoln Financial Advisors

2. 2
Derek Ferriera & Matthew Roberson Mark Gould
California Insurance License 0C80604 and 0665169 Vercor Advisors, LLC
2105 S. Bascom Avenue, #300 1707 Fair Oaks Blvd-Ste 208
Campbell, CA 95008 Fair Oaks, CA 95628
Office phone: (408) 879-4221 Office Phone (916)-965-7732
Derek.ferriera@lfg.com mgould@vercoradvisor.com
matthew.roberson@lfg.com
The information contained in this correspondence is not intended to be a "Covered Opinion"
under Treasury Department Circular 230. If the information is construed to be such an opinion,
the opinion was written to support the promotion or marketing of the transaction(s) or matter(s)
addressed in the opinion and the taxpayer should seek advice based on the taxpayer's particular
circumstances from an independent tax advisor. Furthermore, the opinion does not reach a
conclusion at a confidence level of at least more likely than not with respect to one or more
significant Federal tax issues addressed by the opinion. In addition, with respect to those
significant Federal tax issues, the opinion was not written, and cannot be used by the taxpayer,
for the purpose of avoiding penalties that may be imposed on the taxpayer.

3. 3
Today’s Themes
*There are Best Practices to Internal & External Business Planning
*There are persons who can coordinate the “TEAM” required to
enact the planning. These experts have cross-disciplined expertise.
*M&A professionals need to understand the role of a coordinating advisor
when engaging a Business Owner for a sale, purchase, or lending transaction
*M&A professionals (& the TEAM) need to understand the underlying personal
goals/desires AND fears of the owner to ensure the transaction has the highest
possibility of success.

4. 4
Derek Ferriera & Matt Roberson Q & A
1. What is the Best Practices Process?
2. Please Describe the Steps.
3. Please Describe an Example of a case where this process worked?

5. 5
Value Path
Employee
Benefits
Business
Transfer
Retirement
Planning
Growth
Strategies
EXIT
PLAN
Business Succession
Estate Planning
Retirement Planning
Estate/Asset Protection
Lending
Private Placements
Access to Capital
Business Valuation
M&A
Qualified and Non-Qualified Plans
START
UP
Buy/Sell Agreements
Employee Benefits

6. 6
EXIT STRATEGIES
PLANNED & UNPLANNED
CONTINGENCIES
(Unplanned)
Buy-SellAgreement
How is value pegged?
What chassis?
Which contingencies?
(refer to matrix)
Sale to
3rd party
Merger
IPO
Private
Retain As
Cash Cow
Other
TBD
Public Firm
Gift To Family
EXIT STRATEGY
(planned)
Consulting Deferred
Compensation
Gift To Family

7. 7
Best Practice Succession
Planning Process
 Providing for Your Own (clients) Financial Security
 Setting Exit Objectives (clients)
 Determining Value/Price and Business Uniqueness
 Preserving, Protecting and Promoting Value
 Review, Refine, and Protect Processes
 Retaining and Rewarding Key Persons (Intellectual Capital)
 Capital Needs (Working and Development Capital, Loan Risk?)
 Capital Structure (Voting/Non Voting, Minutes, etc.)
 Contingency Risks (Death, Disability Divorce, etc. 8 D’s)
 Fill Holes (Contingency, Business, etc.)
 Explore Transfer Methods
 Internal, External, Unplanned
 Personal Capital Preservation Planning
 Creditor Protection, Estate Planning, Retirement, and Investment Planning

8. 8
Transfer Options
Determine when
to Transfer?
Sell During
Lifetime When?
Gift During
Lifetime
Sell at Death
Now
Disability
At Retirement
Gift at Death
HOW?
Cash
Installments
Cross Purchase
Stock Redemption
ESOP, MBO/LBO
SCIN, IDIT, GRAT
RECAP
To Whom?
Family
Partner
Key Person
Competitor
3rd Party HOW?
Annual Gifts
Lifetime Gifts
HOW?
Cash
Installments
Buy/Sell Agreement
B.A.T. Trust
Liquidation*
To Whom?
Family
Partner
Key Person
Competitor
3rd Party HOW?
Lifetime Gifts
Gift to CRT
The abbreviated terms are as follows; Business Acquisition Trust, Employee Stock Ownership Bequest
Plan, Management Buyout/Leveraged Buyout, Self-Cancelling Installment Note, Intentionally
Defective Income Trust, Grantor Retained Annuity Trust and Charitable Remainder Trust, and are
hypothetical examples of strategies that may be considered depending on the specific
circumstances of the particular case.
*Default Plan: LIQUIDATION

9. 9
Transfer Options
Transfer
Methods
Transfer
Channels
Co-Owners
Outsiders
Transfer Methods
Buy-Sell
Living Buy-out
Sale
Recapitalization
Merger
Public
IPO
Going Private
Objectives:
• Lifestyle Change
Family
• Cash-out, Diversify
• Create Family Legacy
• Give Employees equity Employees
Gifts, Bequests,
SCINS, Private
Annuities, GRAT’s,
IDIT’s
Default: LIQUIDATION
Channel
MBO/LBO
ESOP
Terms are self
cancelling installment
note, grantor retained
annuity trusts,
intentionally defective
income trusts,
management
buyouts/leveraged
buyouts, and employee
stock ownership plans,
and are hypothetical
examples of strategies
that may be considered
depending on the
circumstances of the
particular case.

10. 10
Step 4: Developing A Successor
Step 1: Identify Job Requirements
Step 2: Assess Bench Strength
Step 3: Select From Within or Recruit
Step 4: Develop a Crisis Contingency Plan

11. 11
Step 4:
Assessing Bench Strength
CEO
President/Sales Mgr VP/Finance Mgr. Production Mgr.
Purch./Materials Mgr.
Outside Sales Finance Asst. Mgr. Production Asst. Mgr
Supervisor Supervisor
50 + Workers
Rank and File
Payroll
(outsource)
Engineer
CPA
QA Mgr.
Inside Sales Receptionist
Customer
Service

12. 12
Ownership
Mom/Dad
Son #1
Owner
Son
2009
50%
50%
Phase II Phase III
50%
50%
0%
100%
Control
100%
0%
100%
50%
0-50%
50-100%
Cash Flow
80% (Via Note)
20% (Net)
80% (Via Note)
20% (Net)
TBA %
TBA %
Phase I
2015 2020 TBA
Sweat Equity Partial
Sale
Sweat Equity Note
Cont’d + Partial
Control Provision
Full Ownership &
Control Transferred
Owner
Son

13. 13
Business Exit Strategy
Corporation/
Partnership
3. Salary Continuation
4. Deferred Compensation
($ at retirement subject to
valuations)
Dad/Owner
Mom
(Buyout f/ remainder
value at death)
7. Collateral Assignment
(accrued loan)
6. Split Dollar (premium)
Gets remaining shares of
company at Owner’s death
Son
Son
Corporation indemnifies Son
and 1. Installment Notes Key EE as Key Employees
5. Rabbi Trust
2. Trusteed Cross
Purchase Buy-Sell
Agreement
Policy

14. 14
Contingency Planning
BUY-SELL DECISION GRID
Owner #1 Owner #2
Death (Wait & See)
Cross-Purchase 1st
Stock Redemption 2nd
YES/NO YES/NO
Disability
Presumptive 6 mos. Wait
9 Mo’s otherwise, own
occupation
YES/NO YES/NO
Departure:
Friendly – Retirement
Unfriendly – Discord
YES/NO
YES/NO
YES/NO
YES/NO
Divorce:
Pre/post nuptial-
Spouse sign off!!
YES/NO YES/NO
Sell Each Other / Gift YES/NO YES/NO
1st Refusal YES/NO YES/NO
Unfriendly Withdrawal YES/NO YES/NO
Retirement YES/NO YES/NO

15. 15
Case Study
*Matt’s Family
Step 1: Retirement needs=$500-$2mm each
Step 2: Improve/Stabilize business for cash cow succession
Step 3: Valuation=4x EBITDA (-) DEBT
Step 4: Facts
*Uniqueness: Turnkey
*Risks: Costs, Competition-little Moat
*Working Capital: via Line of Credit
*Development Capital: None
*Capital Structure: CA “S”, 3 active, 4 inactive+$3mm note to GPA
Voting Structure allows for inaction
*Contingency: Could not afford another After Tax buyout
Step 5: Transfer Methods=on hold due to required clean up
*Planning allowed for Personal & Business Clarity, Leading to Agreement,
Leading to an Easy Decision

16. 16
Mark Gould
Mergers, Acquisitions, Investment Banking
Q&A
Questions:
1. What is the normal M&A Business Sale Process?
2. How is it to work with a Planner in a coordinated Team effort vs. Directly?
3. Top 10 Business Owner Exit Mistakes?
4. Top 10 Reasons Why Business Transactions Fail?
5. Case Study

17. 17
3rd Party Sale Business Process
with Mergers and Acquisitions
Firm
Pre-sale
Planning
Prepare
Offering
Memorandum
Communicate
With
Prospective
Buyers
Obtain
Proposals
Consummate
Transaction
Days: 30 60 120 150
180 –
210
• Gather &
analyze Client
data
• Reduce
expenses,
increase
profits &
maximize
business value
• Prepare
document to
justify price
• Business
purpose,
strategy,
products,
services,
competition,
technology,
management
• Historical &
projected
financials
• Private Equity
groups
• Strategies
sources
• High net worth
individuals,
selectively
• Evaluate terms
• Negotiate to
achieve
optimum
terms among
competing
offers
• Finalize terms
• Work with counsel
to draft
transaction
documentation
• Close
transaction

18. 18
The 10 Biggest Exit
Planning Mistakes
1. The Do-It-Yourself’er
2. Holding on too long
3. Failure to plan/Procrastination
4. Too Busy Fighting Alligators
5. Advisors don’t know how to work together, no
coordinator
6. Unaware there is a defined Exit Plan Process
7. Rush to transaction
8. Fear what to do after business is gone
9. Not Assembling a team
10. Failure to make yourself “obsolete”

19. 19
Top 10 Reasons Business Transactions Fail
Top 10 Reasons Deals Fail at the Altar-Business Owner
1. Fear (lack of deal communication)
2. Inexperienced Advisor Teams (lack of deal planning)
3. Poorly Organized Due Diligence (lack of deal planning)
4. Poor Pre-Shop Business Improvements/Preparations (lack of deal planning)
5. No Enough Bids (poor deal/M&A preparation)
6. Worn Out – dual role as Business Exec & Shareholder (lack of deal
communication)
7. Will Sharing Confidential Information Kill My Business? (lack of deal
communication
8. What Will My Kids/Key EE Do? (lack of deal and family planning)
9. What Am I Going To Do After? i.e.: Health Insurance (lack of personal
planning)
10. Not the Right Price (setting expectations)

20. 20
Case Study – Company Background
 5 yr old medical services company - growing rapidly
 2008 EBITDA $800K, 2009 Projected EBITDA of $4MM - $5MM
 Company needed an infusion of working capital of $4 MM - $6 MM
 Introduced to us by ESG in June 2008 & Engaged in January 2009 for
two-pronged plan:
1. working capital would be sought
2. determine market interest w/ Private Equity Groups (PEGs) &
synergistic companies for an outright acquisition or recapitalization.

21. 21
Options & Opportunities
 Working capital proposals all required more equity than desired
 As a result an outright sale was emphasized – procured 15-20
interests
 Received multiple offers:
Offer Company Proposal Progression Final
1st
Synergistic
2nd
PEG
3rd
PEG
$25 million
$29 million
$16-$22 million
$50 million $55 million
 Accepted $55MM offer & began onsite due diligence
$43 million
Not Enough
-
-

22. 22
The Story Gets Better –
Final Deal & Outcome
 Due Diligence cancelled due to poor synergies
 $60MM topping offer received post Stop Shop from another
synergistic company
 Decided to rescind acceptance of first synergistic company offer
 Final purchase price ended up at $66.3 MM – Closed transaction November 2009
 Summary:
 Timeline – 11 months from engagement
 Clients Valuation Expectation - $15MM to $25MM
 Final Purchase Price Achieved - $66.3M
 Final EBITDA Multiple – 83 x 2008 EBITDA & 13.2 x 2009 Projected
EBITDA
 Client’s Satisfaction – Very, Very, Very HAPPY!!!

23. Personal Planning –
Implementation & Year
End Tax & Legal
Meetings
23
2007
Initial
Business
Planning
Fee
2008
Group & Personal
Planning Meetings
(Goals & Financials)
M&A, CPA, & JD
Firms Engagement
2009
ESG Initial Intro
Videoconference
Group & Personal
M&A
Formal
Proposal
Planning Meetings (Goals
& Financials)
- Continued -
Business Contingency
Life Insurance Implemented
2010
Companies #1 - 4 Talks
Jan to Mar Apr May Jun Jul Aug Sep Oct
Nov
to
Dec
Review
Personal Planning
– Initial
Retirement, Estate
Projections &
Goals Review
GRATs
Implemented
Personal Planning –
Retirement & Estate
Re-Projections
Personal Planning –
Retirement
Re-Projections & Year End
Personal Timelines
M&A, CPA
Financial &
Legal Prep
Begin
(Daily T-CONs)
Company #5 Talks
Begin
SALE CLOSED
CASE TIMELINE