3. Business Owner Symposium
Objective: Help business owners make wise financial
decisions.
Obstacle: Complexity – No one person or
organization can be an expert on everything.
Proposed Solution: Extensive team of specialists in a
wide range of business & personal financial issues.
4. Business Owners & Exit Plans
Business Owners with a Succession Plan (May 2010)
41% Have a
Succession
59% Have No Plan
Succession
Plan
Years Until Exit: % of Business Owners With a Plan
52%
43%
39% 39%
0-3 Yrs 4-6 Yrs 7-10 Yrs 10+ Yrs
5. Dangers of Not Having a Plan
• Leave money on the table at sale
• Not able to afford the lifestyle you’d like in retirement
• Pay too much money in taxes
• Inability to create the legacy that you would like
A study of 300 former business owners who recently sold
their companies showed that 75% of them felt the sale did
not accomplish their personal or financial objectives.
8. Initial Financial Planning Considerations
1. Cost of Living – How much money does it take for
you to live currently, and how much do you
anticipate you will need in retirement?
2. Business Transition – How? When? To whom?
3. Net Worth – Personal financial information
including assets, liabilities, and future
inflows/outflows.
9. Personal Retirement Planning
• How much do you need to “net” from the sale of
your business to be financially independent?
• How does this number (above) compare with a
current business valuation?
• Prior to any consideration of a sale, it is crucial to
know both what you need and what your business is
worth.
10. Personal Retirement Planning
Example: Bob and Susan
• Own a large hardware store
• Want to sell the business
• Spending need is $120,000
• Higher expenses in the first 5 years for travel and a
remodel of their vacation home
• Have an offer for $2,500,000
• Additional savings of $500,000
11. Retirement Spending Goal
(Assuming $2.5mil Business Value)
Today's Year of
Dollars Retirement
Annual retirement spending goals $ 120,000 $ 120,000
Total resources needed to fund goals $ 4,000,216 $ 4,000,216
Maximum attainable annual retirement spending $ 90,087 $ 90,087
Total resources available to fund goals $ 3,000,000 $ 3,000,000
It is projected that your current Your retirement spending is projected to look
resources will fund about 75.01% of like this:
your retirement spending goal.
Current Funding 75.01%
Shortfall 24.99%
12. Retirement Spending Goal
(Assuming $6mil Business Value)
Year of
Today's Dollars Retirement
Annual retirement spending goals $ 120,000 $ 120,000
Total resources needed to fund goals $ 4,000,216 $ 4,000,216
Maximum attainable annual retirement spending $ 192,678 $ 192,678
Total resources available to fund goals $ 6,500,000 $ 6,500,000
It is projected that your current Your retirement spending is projected to look
resources will fund about 162.46% of like this:
your retirement spending goal.
Current Funding 162.46%
Shortfall 0.00%
14. Business Valuation
• Purpose of a Valuation
• Tax versus Non-Tax
• Valuation Methods
• B/(R-G)=V
• B = Benefit Stream
• R = Risk
• G = Growth Rate
• V = Value
• The Valuation Process
17. Maximizing the Value of Your Business
WHAT DOES A POTENTIAL BUYER WANT?
High growth prospects
Larger company size
Long, successful track record
Steady earnings growth
VALUE Management succession in place
Diversified customer / supplier base
Unique product or service
Low growth prospects
Small company size VALUE
Minimal financial history
Volatile earnings
Management succession in doubt
Concentrated customer / supplier base
Generic product or service
19. Sellability: Growth
Action: Identify strategic areas of Growth
growth (i.e. acquiring new Profit-
ability
customers, complimentary products
/ services, new locations)
Sustain-
Risk
ability
19
20. Sellability: Profitability
Action: Create and manage the Profitability
systems in your business that Growth
produce consistent results and
increase effectiveness.
Sustain-
Risk
ability
20
22. Sellability: Sustainability
Profit-
Action: Identify and implement key Growth
ability
systems. Ensure business assets
can transfer to new owner.
Risk
Sustain-
ability
22
23. Sellability: Risk
Action: Review financial, legal, Profit-
Growth
environment, competitive, and ability
industry risk and implement
mitigation plans.
Sustaina
bility
Risk
23
24. Exit Strategies
Thomas H. McConnell
Director
Denver • Boise • Boston • Burlington • Chicago • Greenwich
Newport Beach Pittsburgh San Francisco • Washington DC • West Palm Beach
25. Overview
Privately owned, multi-disciplinary investment banking firm.
The leading firm for serving the private wealth industry in North America, working with
entrepreneurs and business owning families, in partnership with:
- Bank of America / Merrill Lynch - Deutsche Bank
- Barclays Wealth - Goldman Sachs
- Credit Suisse - UBS
National footprint; global reach
Over $15 billion of middle market deals and over $75 billion of deal experience.
Extraordinary debt and equity capital market access for private companies; broad
global reach for buyer and seller access.
INVESTMENT BANK DEAL OF THE YEAR
OF THE YEAR
26. NATIONAL FOOTPRINT, GLOBAL REACH
S- Hertogenbosch
Birmingham
Stockholm Moscow International/Cross-
Nottingham
London
Warsaw Border
Torino Frankfurt
Burlington Paris Milan Deal of the Year
Boston
Boise Greenwich San Sebastian
San Francisco Barcelona Lyon Istanbul
Chicago Pittsburgh
Madrid Tokyo
Denver Washington DC Bilbao
Newport Beach
Bologna
New Delhi
West Palm Beach
Kolkata
Mexico City Mumbai
Bangalore
Bogota
Mauritius
Rio de Janeiro
Johannesburg
Melbourne
North America: 11 offices
Internationally: 30 offices in 17 countries
70 bankers 170 bankers
27. FULL SERVICE INVESTMENT BANK AND ADVISOR
Headwaters
MB
Services Capital
Integrated Headwaters Family
Investment
Business Capital Office Direct
Banking
Services Partners Investment
• Investment banking and advisory services for middle market companies
seeking liquidity for owners, capital for growth, or advice on value
enhancement and transitioning through generations
• Proprietary capital for private companies in upper middle market across all
industries
28. THE TRANSITION WAVE 2011-2025
During the next 15 years, the private owners of 83% of middle market companies will either have to decide
to transition their companies to the next generation of owners / executives or to monetize their ownership
interests and turn over succession management and business transition to a new owner.
This represents over 40,000 companies (revenue $25mm+) with roughly $5 trillion of enterprise value.
31. PRIVATE EQUITY IS UBIQUITOUS
Approximately $450 billion in equity
capital
4,300 private equity investments are now
at least 3 years old
Median time from buyout to exit is 4.8
years
Most prevalent in business products and
services, consumer products and
services, IT, and healthcare, Also
invested in financial services, energy and
materials and resources.
Source: Pitchbook
35. Credit Market Update
• Credit is available
• Consider Risk vs. Reward and set realistic expectations with your credit partners
• Structure is crucial
• There is more to a credit deal than price
• Credit partners / advisors are essential
• There is a difference between a Banker and a Lender
• Banks can and should work with non bank providers of credit
• Relationships are built over time
37. HIGHER MULTIPLES FOR PREPARED COMPANIES
Valuation Gap
- Today’s market: Robust
demand for high
quality/prepared companies
- 11% price premium
Source: GF Data Resources
39. CURRENT MARKET CONDITIONS
What Happened in 2011?
- Economic uncertainty
- European debt crisis
- Political and regulatory uncertainty
- Slower improvement in middle market vs. multinationals
Why Things Will Pick-Up in 2012/2013:
- Improving economy
- Renewed optimism (reflected in stock and bond prices)
- Anticipated capital gains tax increases in 2013
- Presidential election will help resolve political uncertainty
- PEGs pressured to deploy capital (use it or lose it)
- Moderate GDP growth=> strategic need acquisitions to achieve growth targets
- Supply/demand imbalance
- Baby boomer exits
41. THE RE-EMERGENCE OF THE PRIVATE EQUITY BUYER
EV/EBITDA for Private Equity vs. Strategic Buyers
Source: Capital IQ
42. PRIVATE EQUITY VS STRATEGIC BUYER
How to decide?
- Determine your transactional goals and objectives (financial and nonfinancial)
• Seeking partner or near term exit?
- Evaluate the probable level of private equity interest
• Profit margins (EBITDA)
• Growth prospects
• Differentiated product or service offering
• Platform or add-on
• Reviewed or audited financial statements
• Management team
- Evaluate the probable level of strategic interest
• Complementary customer base
• Complementary geographic areas (could allow entry to new market or be
overlapping)
• Potential for economies of scale (cost savings)
• New product lines or access to new technology
- Go to market and choose based on empirical data
44. PROCESS
Day
1 30 60 90 120 150 180
Key Events
Pre- Marketing Phase
Initial Diligence
Preparation of Confidential Memorandum "CM"
Creation of Buyer List
Finalize Teaser and NDA
Contact Potential Buyers, Negotiate and Execute NDAs
Preparation of Online Data Room
Marketing Phase
Distribution and Review of CM
Preparation of Management Presentation
Rehearse Management Presentations
Receive / Evaluate Initial Indications of Interest
Purchase Agreement "PA" Prepared and Distributed
Buyer Diligence and Data Room Access
Management Presentations
Respond to Continued Diligence Inquiries
Closing Phase
Receive and Evaluate Final Indications of Interest
Negotiate with Lead Parties and Conclude Due Diligence
Execute SPA
Satisfy Regulatory, Administrative and Consent Requirements
Closing
Pre- Marketing Marketing Closing
48. What Type of Entity Do You Use To
Conduct Business?
• Pass-through Entities
• Sole proprietorship
• Partnership
• Limited liability company (“LLC”)
• S corporation (BEWARE BUILT-IN GAINS!)
• Pass-through entities offer more flexibility in
negotiating the terms of the sale.
• C corporations can trigger double taxation upon the
sale of business assets and subsequent distribution
to owners.
50. Selling Assets or Stock
• Buyers prefer purchasing assets
• Sellers prefer to sell stock
51. Selling Assets or Stock
• Buyers prefer purchasing assets
• Tax basis = purchased price (basis step up)
• Future tax deductions
• Little or no risk that they will assume any unknown seller liabilities.
• Seller still owns the corporation !!
• Need to dispose of in some fashion?
52. Selling Assets or Stock
• Sellers prefer to sell stock
• Capital gain treatment on the sale.
• In a stock sale:
• Buyer gets no step-up in the asset basis
• Seller often indemnifies buy against past actions
53. Capital Gains/ Dividends
Tax Bracket 1/1/01 – 5/5/03 5/6/03 - 2007 2008 - 2012 2013 **
10% and 15% 8%/10 5% 0% 10%
25% and above 20% 15% 15% 20%
** After 2012, dividends treated as ordinary income, potential
taxed at 39%
- 25% rate still applies to RE depreciation
recapture
- 28% rate still applies to Collectibles
54. Allocation of Purchase Price – Asset
Sale
• Federal Ordinary Income Rates 15% to 35%.
• Federal Capital Gain Rates 0% to 15% (general
rule)
• Which rate do you want to Pay ???
55. Allocation of Purchase Price
• Ordinary Income Items:
• Accounts Receivable (cash basis taxpayer)
• Inventory
• Depreciation Recapture
• Capital Gain Items:
• Land
• Investments
• Etc
• Seller wants price allocated to Capital Gain Items
• Buyer generally like to allocate purchase price to shorter-lived
assets such as receivables, inventory and equipment.
56. Additional Payments to Seller –
Personal Goodwill
• Buyer pays one amount for the corporate stock
• Buyer pays other amounts directly to the owners for
• Consulting
• Covenant not to compete
• Interest
• Property rentals
• Intellectual property
• Licenses
• Advantage to Seller is generally a disadvantage to Buyer
• Personal Goodwill
• Long-term capital gain to the seller / 15 year write-off to buyer
• Who owns the Goodwill – Business or Individual ??
• IRS can challenge the allocation !!!!
57. Installment Sale
• Installment Sales
• Earnout / Contingent Payments
• Tax Deferred Exchanges
• State and Local Tax Issues??
58. Sustainable Income / Wealth Preservation
Chris Fout, CFP ®
Senior Financial Planner
Key Private Bank
59. Sustainable Income / Wealth Preservation
• How do I “get paid” after I stop working?
• Accumulation Phase (Wealth Creation) vs.
Distribution Phase (Wealth Preservation)
• Minimizing Risk
60. Legacy Planning
• Where do you want your money to go?
• Heirs
• Charitable organizations
• IRS
• Determine the surplus
• The sooner the planning is done, the better the
results
62. Disclosures
United States Treasury Department Circular 230 Disclosure – To ensure compliance with requirements imposed by the
IRS, we inform you that, unless expressly stated otherwise, and U.S. Federal tax advice contained in this
communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose
of (i) avoiding penalties under Internal Revenue Code of (ii) promoting, marketing or recommending to another party any
transaction or matter addressed herein.
IRS Circular 230 notice: Any tax advice contained herein was not intended or written to be used, and cannot
be used, by you or any other person (i) in promoting, marketing or recommending any transaction, plan or
arrangement or (ii) for the purpose of avoiding penalties that may be imposed under federal tax law.
Editor's Notes
Most businesses are not sellable because the owner has not strategically managed for this outcome.Sellability = AttractivenessYou business has to be attractive to others in order to have sellability. What makes it attractive? The right balance of past (financial performance), present (systems, facilities and capabilities), and future (sustainability and risk mitigation).Focus on the areas of your business that make it successful and will make it attractive to potential business buyers. Manage and operate your business like you will leave it in the future!
Demonstrated revenue, profit, customer and offering growth over period of time (i.e. 2 – 3 Years). Successful financial picture is attractive to external viewers.
Planned and achieved profitability: customer, product, location, employee.Profitability is key to increased valuation and demonstrates solid management and performance.
Planned and achieved profitability: customer, product, location, employee.Profitability is key to increased valuation and demonstrates solid management and performance.
Key systems and the and ability to transfer of customers, contract, and key management/employees.Sustainability is critical to sustained success and helps owner achieve ROI.
Identification and mitigation of risk.Risk mitigation demonstrates sound management and increases probability of success. This builds confidence.