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Exit strategy planning educational linkedin

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Exit strategy planning educational linkedin

  1. 1. EXIT STRATEGY PLANNING “Achieving optimum value for your business”Presented by:Denis M. BrownAbraxas Business Services5279 Glenridge Drive NEAtlanta, GA 30342(404) 843-8618dbrown@abraxas.biz3/18/13 ABRAXAS BUSINESS SERVICES 1Copyright © 2012
  2. 2. EXIT STRATEGY PLANNING “You’ve gotta to be careful if you don’t know where you are going because you might not get there” Yogi Berra.3/18/13 ABRAXAS BUSINESS SERVICES 2Copyright © 2012
  3. 3. EXIT STRATEGY PLANNING3/18/13 ABRAXAS BUSINESS SERVICES 3Copyright © 2012
  4. 4. EXIT STRATEGY PLANNING Exit Strategy PlanningBusiness Planning Estate Planning “Exit Strategy Planning coordinates and integrates Business Planning and Estate Planning based on the Business Owner’s objectives”3/18/13 ABRAXAS BUSINESS SERVICES 4Copyright © 2012
  5. 5. MARKET NEED•  Based on a 2005 survey by PriceWaterhouseCoopers’: –  More than 4.5 million business owners are 50 years old or older. –  67% of business owners of firms with revenues from $5 million to $150 million plan to leave the business within the 10 years. –  More than 75% of the owners have not done much planning for what will probably be the single most significant financial event of their lives.•  M&A Marketplace: ―  Success rate is 1 in 4 actually sells(1) ―  Success rate for businesses with sales of $10 million – 1 in 3(1) ―  Success rate for businesses with sales above $10 million – 50-50(1) (1) 2005 Business Reference Guide by Tom West3/18/13 ABRAXAS BUSINESS SERVICES 5Copyright © 2012
  6. 6. EXIT ALTERNATIVES•  Sell to a Strategic Buyer – 100% liquidity.•  Sell to a Financial Buyer – up to 100% liquidity.•  Sell to Management/Family– up to 100% liquidity.•  Recap – harvest a majority of your net worth and retain minority ownership “for a second bite of the apple” but still maintain operational control of the business.•  ESOP – up to 100% liquidity selling the business to the employees.•  IPO – initial public offering.•  Liquidate.Is your company positioned to consider multiple exit alternatives or are youralternatives limited?3/18/13 ABRAXAS BUSINESS SERVICES 6Copyright © 2012
  7. 7. ISSUES LIMITING EXIT ALTERNATIVES AND VALUE•  Is there an heir apparent or a management team capable of taking the business to the next level or run the business in the owner’s absence?•  Do you have a relatively consistent cash flow performance trend?•  Does your largest customer account for less than 20% of sales?•  Do you have multiple suppliers for product or raw materials?•  Do you have systems and processes to properly manage the business in the future and provide the level of service expected from your customer base?•  Does the business have opportunities for growth through geographic expansion, product line extensions or new channels of distribution?•  Do you have excess capacity to support future growth?A “NO” to any of these questions may limit your alternatives and depress thevalue of your business. Proper Exit Strategy Planning addressing these andother issues will produce the desired results positioning the business as anattractive investment from multiple sources.3/18/13 ABRAXAS BUSINESS SERVICES 7Copyright © 2012
  8. 8. INGREDIENTS OF A SUCCESSFUL EXIT•  A written Exit Strategy Plan based on an owner’s objectives.•  Designed and implemented by an experienced team of advisors.•  Cash flow, maximizing value•  Management Team capable of running the business.•  Time.3/18/13 ABRAXAS BUSINESS SERVICES 8Copyright © 2012
  9. 9. EXIT PLAN COMPONENTS3/18/13 ABRAXAS BUSINESS SERVICES 9Copyright © 2012
  10. 10. EXIT PLAN COMPONENTS Quantify Business Define Owner and Personal Objectives Resources Maximize Ownership Personal and Ownership Business Transfer to Wealth Protect Transfer to Continuity Third and Estate Business Insiders Planning Parties Planning Value COMPREHENSIVE EXIT PLAN3/18/13 ABRAXAS BUSINESS SERVICES 10Copyright © 2012
  11. 11. SEVEN STEP PROCESS•  Step 1 – Identify Exit Objectives•  Step 2 – Quantify Business and Personal Financial Resources•  Step 3 – Maximizing and Protecting Business Value•  Step 4 – Ownership Transfer - Selling to Third Parties•  Step 5 – Ownership Transfer - Selling to Insiders•  Step 6 – Business Continuity•  Step 7 – Personal Wealth and Estate Planning3/18/13 ABRAXAS BUSINESS SERVICES 11Copyright © 2012
  12. 12. 1. IDENTIFY EXIT OBJECTIVESThe process begins with answering three questions:•  How much longer does an owner want to work in the business before retiring or moving on?•  What annual after-tax income does the owner want during retirement?•  To whom does the owner want to sell the business?Benefits to the Owner:•  Clarifies priorities.•  Facilitates progress by identifying a desired outcome.•  Controls and defines the Exit Strategy Planning process.3/18/13 ABRAXAS BUSINESS SERVICES 12Copyright © 2012
  13. 13. 1. IDENTIFY EXIT OBJECTIVESAdditional Objectives:•  Shift wealth to children.•  Provide charitable gifts or transfers.•  Reward employees.•  Receive full value for the business.•  Take business to the next level.3/18/13 ABRAXAS BUSINESS SERVICES 13Copyright © 2012
  14. 14. 1. IDENTIFY EXIT OBJECTIVESAdvisory Team:•  Who is the advisory team? –  Attorney – Estate, Tax, Corporate –  Wealth Management Advisor, Financial Planner –  CPA –  Insurance Advisor –  Valuation Specialist –  Exit Strategy Planning Specialist•  No one professional has all the answers.•  Diverse skills and talents are necessary.•  Team approach minimizes time and cost.3/18/13 ABRAXAS BUSINESS SERVICES 14Copyright © 2012
  15. 15. 2. QUANTIFY BUSINESS AND PERSONAL FINANCIAL RESOURCES•  Perform a third party valuation of the business.•  Perform a “needs assessment” to determine the amount of after-tax dollars needed to lead the desired lifestyle after exiting the business.•  Do the combined business and personal financial resources meet your objectives?3/18/13 ABRAXAS BUSINESS SERVICES 15Copyright © 2012
  16. 16. 3. MAXIMIZING AND PROTECTING BUSINESS VALUEBenefits to the Owner:•  Increase enterprise value by creating and enhancing the value drivers of the business.•  Tax strategy -reduce income taxes upon sale of business.•  Protect assets from potential business and personal creditors.•  Motivate and keep key employees.•  Create ability to sell the business.3/18/13 ABRAXAS BUSINESS SERVICES 16Copyright © 2012
  17. 17. 3. MAXIMIZING AND PROTECTING BUSINESS VALUEValue Drivers:•  Proven management team.•  Consistent financial performance; upper quartile relative to peers.•  Realistic growth strategy.•  Market defensibility.•  Reliable operating systems, processes and financial controls.•  Product differentiation.•  Proprietary technology.•  Established and diversified customer base.•  Established and diversified vendor base.3/18/13 ABRAXAS BUSINESS SERVICES 17Copyright © 2012
  18. 18. 3. MAXIMIZING AND PROTECTING BUSINESS VALUEProcess:•  Assess industry structure, the balance of power of your business (Supplier Power, Buyer Power, Competitive Rivalry, Threat of Substitution and Threat of New Entry).•  Perform a SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis of the business.•  Analyze competitive position, advantages and value drivers of the business.•  Review operating systems and processes.•  Assess human resources, asset and capital requirements.•  Assess value creation alternatives.•  Develop a strategic plan to enhance the value drivers of the business and address weaknesses and threats; positioning the business to achieve optimum value on an after tax basis.3/18/13 ABRAXAS BUSINESS SERVICES 18Copyright © 2012
  19. 19. FIVE FORCES – BALANCE OF POWERThreat of New Entry: Competitive Rivalry:Cost advantages Threat Number of CompetitorsEconomies of scale of New Quality differencesTime and cost of entry Entry Customer loyaltyBarriers to entry Switching costs Supplier Power Competitive Buyer Power RivalrySupply Power:Number of suppliers Buyer Power:Size Number of customersCost of Changing Price sensitivity Ability to substituteThreat of Substitute: Threat ofCost of Change SubstitutePerformance3/18/13 ABRAXAS BUSINESS SERVICES 19Copyright © 2012
  20. 20. SWOT ANALYSISStrengths: Weaknesses:What do others see as your strengths? What factors lose you sales?What do you do well? What could you improve?What advantages do you have? Where do you have fewer resources?What unique resources do you have? What do others see as weaknesses?Opportunities: Threats:What opportunities are open to you? What trends can harm you?Take advantage of current trends? What is your competition doing?Can you turn your strengths into What threats do your weaknessesopportunities? expose you to?3/18/13 ABRAXAS BUSINESS SERVICES 20Copyright © 2012
  21. 21. 3. MAXIMIZING AND PROTECTING BUSINESS VALUEPossible recommendations:•  Management Team Development Plan.•  Profit margin improvements (outsourcing processes, procurement costs, pricing, production improvements, cost reductions, acquisitions).•  Key Employee Incentive Compensation Plan (stock bonus, stock appreciation rights, non-qualified compensation plan, cash bonus).•  Separation of business assets from business operations.•  Non- solicitation, Non-compete agreements.•  Wealth transfer to children during owner’s lifetime.3/18/13 ABRAXAS BUSINESS SERVICES 21Copyright © 2012
  22. 22. 4. OWNERSHIP TRANSFER – SELLING TO THIRD PARTIESBenefits to Owner:•  Cash at closing.•  Eliminate or reduce financial risk.•  No family succession issues.•  Speed of exit.3/18/13 ABRAXAS BUSINESS SERVICES 22Copyright © 2012
  23. 23. 4. OWNERSHIP TRANSFER – SELLING TO THIRD PARTIESConsiderations:•  Ability to sell and business value determined by: ―  Intrinsic Value: the value drivers ―  Extrinsic Value: the value the market places on the business ―  Effectiveness of the sale process•  M&A Marketplace: ―  Success rate is one out of four actually sells(1) ―  Success rate for businesses with sales of $10 million – one out of three(1) ―  Success rate for businesses with sales above $10 million – 50-50(1)•  Positioning the business for sale, pre-sale due diligence and tax planning. (1) 2005 Business Reference Guide by Tom West3/18/13 ABRAXAS BUSINESS SERVICES 23Copyright © 2012
  24. 24. 5. OWNERSHIP TRANSFER - SELLING TO INSIDERSBenefits to the Owner:•  Achieves exit objective of: ―  Selling to key employee group ―  Transferring to a relative•  Motivates and retains key employees.•  Planning reduces risk and increases amount of cash received by minimizing the tax consequences for both the seller and buyer.3/18/13 ABRAXAS BUSINESS SERVICES 24Copyright © 2012
  25. 25. 5. OWNERSHIP TRANSFER - SELLING TO INSIDERSThe 5 Rules of Engagement for Insider Transfers•  Do not take an inordinate amount of risk on the front end.•  Do not give up control until receiving the last dollar.•  Shorten the timeline as much as possible.•  Minimize taxes for both parties.•  Utilize the cash flow of the business as efficiently as possible since that is the resource paying for the transfer.3/18/13 ABRAXAS BUSINESS SERVICES 25Copyright © 2012
  26. 26. 5. OWNERSHIP TRANSFER - SELLING TO INSIDERSSale to a Third Party for Cash: Fair Market Value = $10,000,000 Cash Flow = $2,500,000 Buyer Owner Cash for purchase $8,000,000 Net of Tax3/18/13 ABRAXAS BUSINESS SERVICES 26Copyright © 2012
  27. 27. 5. OWNERSHIP TRANSFER - SELLING TO INSIDERSSale to Employee for Installment Note: Fair Market Value = $10,000,000 Cash Flow = $2,500,000 Employee Cash flow from business $2,500,000 - $1,500,000 (net Owner of taxes) Cash to Owner $1,200,000 $8,000,000 Net of Tax (net of taxes) Timing: 7 – 9 years3/18/13 ABRAXAS BUSINESS SERVICES 27Copyright © 2012
  28. 28. 5. OWNERSHIP TRANSFER - SELLING TO INSIDERSTransfer to Employee Phase 1: Fair Market Value = $5,000,000 - $10,000,000 Cash Flow = $2,500,000EmployeePurchased 40% for $2,000,000 Owner($1,000,000 of cash flow per $480,000 Net of Taxyear to employee) $1,440,000 After 3 YearsOwner OwnerCash flow from business $900,000 Net of Tax$1,500,000 $2,700,000 After 3 Years3/18/13 ABRAXAS BUSINESS SERVICES 28Copyright © 2012
  29. 29. 5. OWNERSHIP TRANSFER - SELLING TO INSIDERSTransfer to Employee Phase 2: Fair Market Value = $5,000,000 - $10,000,000 Cash Flow = $2,500,000 Owner $4,800,000 Net of TaxEmployeePurchased 60% for $6,000,000 Owner $8,940,000 After 3 Years Timing: 3 years3/18/13 ABRAXAS BUSINESS SERVICES 29Copyright © 2012
  30. 30. 5. OWNERSHIP TRANSFER - SELLING TO INSIDERSPossible recommendations:•  Sale of ownership interest (cash, note or bank financing).•  Bonus or gift of ownership interest.•  Grantor Retained Annuity Trust (GRAT).•  Non-qualified deferred compensation plan (409a).•  Buy back agreement for minority owner.3/18/13 ABRAXAS BUSINESS SERVICES 30Copyright © 2012
  31. 31. FAMILY SUCCESSION ISSUES•  Only one third of family businesses are passed to the second generation•  Only 10% are passed to the third generation•  Less than 4% are passed to the fourth generationReasons:•  Children may not get along•  Different career goals•  Inability for parents to achieve financial goals•  Unable to run the business3/18/13 ABRAXAS BUSINESS SERVICES 31Copyright © 2012
  32. 32. INGREDIENTS OF SUCCESSFUL FAMILY TRANSFER•  A written plan –  Defines financial independence –  Defines fairness in distribution –  Timeline•  Only one child becomes sole successor or at least control•  Business transition plan is fair to all•  Parents achieve financial security independent of the business•  Business active child demonstrates the ability and willingness to run the business•  There is a backup Plan B3/18/13 ABRAXAS BUSINESS SERVICES 32Copyright © 2012
  33. 33. INGREDIENTS OF SUCCESSFUL TRANSFERReasons for backup Plan B:•  Value increases to a point a buyout is financially too difficult•  Increase in value exceeds value of other assets – “fairness”•  Business becomes too complex or sophisticated for one child•  Child loses interest or becomes ill3/18/13 ABRAXAS BUSINESS SERVICES 33Copyright © 2012
  34. 34. 6. BUSINESS CONTINUITY PLANNINGBenefits to the Owner:•  Objectives can still be achieved if you do not survive your exit.•  Retains ownership and control of business if co-owners depart.•  Can force non-contributing owners to leave the business.•  Provides consistency between lifetime and death objectives.•  Ensures survival of the business for the benefit of others by: –  Addressing continuity of ownership –  Addressing the potential loss of financial resources –  Addressing loss of key talent, customers and vendors3/18/13 ABRAXAS BUSINESS SERVICES 34Copyright © 2012
  35. 35. 6. BUSINESS CONTINUITY PLANNINGPossible Recommendations:•  Review and update continuity guidelines.•  Review and update Buy-Sell (Shareholder) Agreement –  Valuation –  Funding mechanism –  Address voluntary and involuntary termination•  Insurance for continuity planning.•  Stay bonus plan.•  Plan for financial independence of the business.3/18/13 ABRAXAS BUSINESS SERVICES 35Copyright © 2012
  36. 36. 7. PERSONAL WEALTH AND ESTATE PLANNINGBenefits to the Owner:•  Preserve wealth, minimize taxes using both lifetime and death planning tools.•  Coordinates and integrates lifetime exit objectives with the estate plan.•  In effect, estate planning becomes part of the business planning.3/18/13 ABRAXAS BUSINESS SERVICES 36Copyright © 2012
  37. 37. 7. PERSONAL WEALTH AND ESTATE PLANNINGPossible Recommendations:•  Personal asset protection planning.•  Personal and family insurance.•  Transferring of specific non-business assets.•  Personal wealth management plan.3/18/13 ABRAXAS BUSINESS SERVICES 37Copyright © 2012
  38. 38. REALITYEventually every owner will exit their business voluntarily or otherwise. ProperExit Strategy Planning will enable you to have an element of CONTROL:•  transition under your time frame•  maximize the after-tax value of your business•  ensure continuity in case of an unexpected event•  assure financial security for you and your family3/18/13 ABRAXAS BUSINESS SERVICES 38Copyright © 2012
  39. 39. CASE STUDY (1) – ASSET PROTECTION, WEALTH TRANSFERFACTS:•  Retained to position the Company for a third party transaction (strategic).•  Profitable growing business (20+% EBITDA, 10+% growth).•  38 vehicles, recently 7 wrecks over a 45 day period.•  Purchase 5 to 6 new vehicles each year.•  Owner has considerable wealth outside the business.KEY ISSUES:•  Asset Protection – high risk assets, ambulance chasers dream.•  Wealth Transfer - continued asset accumulation within the estate.3/18/13 ABRAXAS BUSINESS SERVICES 39Copyright © 2012
  40. 40. CASE STUDY (1) - SOLUTIONSAsset Protection – High Risk Assets•  Made trusted advisors aware of the issue.•  Addressed tax issues relating to possible transfer.•  Separated vehicles and drivers in to a new legal entity, leased back to operating company.Wealth Transfer – Asset Accumulation•  Setup a FLP to purchase new vehicles, leaseback to new entity.3/18/13 ABRAXAS BUSINESS SERVICES 40Copyright © 2012
  41. 41. CASE STUDY (2) – CREATE ABILITY TO SELLFACTS:•  Profitable business run by son of the founder and brother-in-law.•  C Corp. owned equally by son and daughter of founder.•  Brother-in-law set up an LLC to perform complementary services.•  Tried to sell the business 4 years ago, no takers, children not interested .•  Retained to position the business for a third party transition.KEY ISSUES:•  Tax problem – C Corp. asset sale.•  No management team succession plan.•  Customer concentration issue.3/18/13 ABRAXAS BUSINESS SERVICES 41Copyright © 2012
  42. 42. CASE STUDY (2) SOLUTIONTAX PROBLEM:•  Old Co/New Co – the LLC is leasing the assets from the C Corp, all ongoing purchases and billings are through LLC.•  Overtime diminishes the value of the C Corp and increases value of LLC minimizing the double taxation from an asset sale.MANAGEMENT TEAM:•  Hired an heir apparent.•  If proven capable over time need to implement an incentive retention program (SAR, phantom stock, stock options, stock bonus or stock purchase).CUSTOMER CONCENTRATION:•  In process of developing a marketing strategy to broaden customer base in served industries, previously non-existent.3/18/13 ABRAXAS BUSINESS SERVICES 42Copyright © 2012
  43. 43. CASE STUDY (3) – TRANSFER TO MANAGEMENTFACTS:•  Profitable C Corp with a management team.•  Owner wants to retire in 3 to 5 years.•  Considerable net worth outside of business.•  No family in the business.•  Considering transferring to management, management running day to day.KEY ISSUES:•  Tax issue, C Corp (FICA).•  Tax issue, $200,000 cash on the balance sheet.•  Legacy, make it sustainable.3/18/13 ABRAXAS BUSINESS SERVICES 43Copyright © 2012
  44. 44. CASE STUDY (3) SOLUTIONTAX ISSUES:•  Remember the 5 Rules of Engagement•  Owner 20 years older than management, 412 Defined Benefit Plan - $200,000 cash off the balance as an expense to prefund owner’s retirement plan.•  Trademark the company brand in a separate entity owned by the owner and leased back to the company.•  Increased real estate lease to market rate.•  The above actions reduced stock value (lowest defensible value).•  Next year initial transfer of ownership via installment sale (40%).LEGACY:•  Reviewing and updating systems and processes.•  Reviewing potential growth strategies.3/18/13 ABRAXAS BUSINESS SERVICES 44Copyright © 2012
  45. 45. CASE STUDY (4) – OUTDATED BUY-SELLFACTS:•  Retained to position the Company for a third party transaction (strategic).•  Profitable growing business start 12 years ago.KEY ISSUES:•  Outdated Buy-Sell – 12 years since last review. –  Only addressed death and not disability, divorce or retirement. –  Funding mechanism issue – one partner and wife not insurable but has accumulated wealth outside the business. –  Other partner spends every nickel that comes through the door.3/18/13 ABRAXAS BUSINESS SERVICES 45Copyright © 2012
  46. 46. SOLUTION (4) – OUTDATED BUY-SELLBuy-Sell Funding Mechanism•  Group Term Life – limited.•  Captive Insurance Company (pending). –  $1.2 million tax free. –  Help with the funding of Buy-Sell over time. –  Forced retirement savings for the other partner.3/18/13 ABRAXAS BUSINESS SERVICES 46Copyright © 2012
  47. 47. CASE STUDY (5) – TRANSFER TO FAMILY MEMBERSFACTS:•  Profitable construction business with two sons and a daughter active.•  Oldest son is heir apparent, capable and has support of siblings.•  Each child owned 10%, 30% in aggregate; non-family manager owned 10% and the parents owned 60%.•  Father/Founder wanted to retire in three years and wanted each child to have equal share (with as much gifting as possible).KEY ISSUES:•  Determine after tax life style spending.•  Determine after tax dollars needed from the business.•  Develop a tax efficient transfer structure.•  Update an appropriate Buy-Sell Agreement.•  Never considered the control issue.3/18/13 ABRAXAS BUSINESS SERVICES 47Copyright © 2012
  48. 48. SOLUTION (5) – TRANSFER TO FAMILY MEMBERS•  Quantified annual spending and after tax dollars needed from the business.•  Developed tax efficient structure: –  Recapitalized into 13.5% voting and 86.5% non-voting (67% of voting held by parents and the remaining voting held by oldest son, his original 10%). –  Parents remaining interest in non-voting stock, approximately 51% interest was gift equally to each child; leaving 9% ownership interest but voting control. –  On retirement in 3 years the children will buy the remaining shares at fair market value in an installment sale leaving oldest son with voting control. –  Setup a SERP payable over five years starting at retirement. –  Structure was cleared with bonding agent with parents still on the bond until retirement.•  Updated the Buy-sell Agreement, valuation standard Rev Ruling 59-60, addressed funding and triggering events.3/18/13 ABRAXAS BUSINESS SERVICES 48Copyright © 2012
  49. 49. CASE (6) – BUSINESS CONTINUITY PLANFACTS:•  Owner, mid 40s, of a successful business who likes flying his plane.•  Capable management team and wife were concerned with the unexpected event.•  Wife is involved in the business but no desire to run.ISSUES:•  No formalized Continuity Plan outlining his wishes.•  Outdated estate plan and under insured.•  No incentive plan locking down management team.•  No Non-Competes.3/18/13 ABRAXAS BUSINESS SERVICES 49Copyright © 2012
  50. 50. SOLUTION (6) - BUSINESS CONTINUITY PLANFormalized a Business Continuity Plan (discussed with key employees, the bankand key relationships)•  Designated who will run the company•  Realigned key positions•  Sell to a strategic player when practical (designated 3 IBs with experience in the industry to interview)•  Implemented a policy all key relationships (customers and vendors) had two points of contactUpdated estate plan including establishing trusts for the children and sizeableincrease in insurance coverage.Implemented a Stay Bonus Program payable over time based on a percentage ofbase salary and a percentage of net proceeds so long as the employee remainedin good standing over the designated time period. Agreement included Non-Competes.3/18/13 ABRAXAS BUSINESS SERVICES 50Copyright © 2012

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