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Ownership Transfer and Business
          Succession


         Presented by
          John Reed
Ownership Transfer vs. Business Succession
• Ownership transfer can occur with or without a
  change in management through...
Why Consider It Now?

•Business valuations historically low

•Interest rates low

•Bonding is more difficult

•Having a su...
General Succession / Transfer Strategies

• Sale to an outside buyer

• Employee Stock Ownership Plans (ESOP)

• Transfer ...
Outside Sales and ESOPs Harder To Do In Today’s
                    Market
  • Limited market for construction companies
 ...
Ownership Transfer Methods
• Create new company / Wind down old company

• Insurance funded transfer at death or disabilit...
Grantor Retained Annuity Trusts (GRATs)
• An estate planning transfer technique
• Not a new strategy, but one that fits we...
Zero-Out GRAT
• Owner transfers (often nonvoting) stock to
  GRAT

• Owner retains an annuity interest equal to
  assets t...
Sample GRAT Calculation
•Fact pattern – S corporation contractor worth
approximately $3,000,000. Net income
$250,000. Tax ...
Sample GRAT Results
•Shareholder contributes 35% of company in non-
voting shares to GRAT in February 2009 in exchange
for...
Zero-Out GRAT Calculation
Zero-Out GRAT “Sweet Spot”

• Low IRC 7520 interest rate

• Income generates cash flow available to distribute
without a n...
LarsonAllen LLP


• Appendix
  – Information about LarsonAllen and
    LarsonAllen’s Construction and Real Estate
    Group
LarsonAllen Construction and Real Estate Group
 Nationally Oriented CPA & Business Consulting Firm
   Established in 1953 ...
LarsonAllen Locations
              Upper Midwest
              Minneapolis, St. Cloud, Austin, Alexandria and
           ...
Construction & Real Estate Group
Construction and Real Estate industry
commitment –
  Focus on industry knowledge and prac...
Florida Construction and Real Estate Principals
Naples
Sue Christopher (Lead Florida Principal),
  schristopher@larsonalle...
Noticeably Different
Construction Operations Consulting
   Information System Selection and Implementation
   Business Pla...
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2009 Florida Surety Assoc Business Succession

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May 12, 2009 presentation on Business Succession to the Florida Surety Association annual Orlando meeting

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2009 Florida Surety Assoc Business Succession

  1. 1. Ownership Transfer and Business Succession Presented by John Reed
  2. 2. Ownership Transfer vs. Business Succession • Ownership transfer can occur with or without a change in management through the use of voting and nonvoting shares. • Business succession can be planned with or without an immediate ownership transfer • Business succession begins be assembling a management team and spreading the concentration of management responsibility
  3. 3. Why Consider It Now? •Business valuations historically low •Interest rates low •Bonding is more difficult •Having a succession plan in place is attractive to sureties •Owner estate tax planning
  4. 4. General Succession / Transfer Strategies • Sale to an outside buyer • Employee Stock Ownership Plans (ESOP) • Transfer at death or disability through an insurance contract • Developing buyer(s) from within / becoming a Succession Organization. Hardest part usually is finding and developing the new leader
  5. 5. Outside Sales and ESOPs Harder To Do In Today’s Market • Limited market for construction companies today. • Contractor consolidators out of business • Venture capital firms generally not interested in contractors. • Employee Stock Ownership Plans (ESOPs) are less viable today than they once were.
  6. 6. Ownership Transfer Methods • Create new company / Wind down old company • Insurance funded transfer at death or disability • Bargain sale • Significant bonuses to buyer used to purchase seller’s stock • Phantom stock or nonqualified deferred compensation • Gifting using annual and lifetime gift exclusions
  7. 7. Grantor Retained Annuity Trusts (GRATs) • An estate planning transfer technique • Not a new strategy, but one that fits well in today’s economy. • Transfer of shares from one shareholder to other(s) • Utilizes IRC 7520 rate for month of transaction. • Death during term results in estate tax inclusion. • Not a good technique for transfer to grandchildren as GST allocated at end. • Can zero-out, resulting in no gift. • Authority for GRATs is defined in IRC. • Valuation self-adjusts.
  8. 8. Zero-Out GRAT • Owner transfers (often nonvoting) stock to GRAT • Owner retains an annuity interest equal to assets transferred, resulting in zero gift. • If assets appreciate more than IRC 7520 rate, (2009 rates have ranged from 2.0% to 2.6%, currently at 2.4% for May 2009), all additional value is transferred to new owner without using any unified credit.
  9. 9. Sample GRAT Calculation •Fact pattern – S corporation contractor worth approximately $3,000,000. Net income $250,000. Tax on S corporation income handled through owner withholding. •Contractor wishes to make key employee a 10% to 15% owner. •Normal shareholder agreements put in place. •Uses a Zero-Out GRAT as the transfer vehicle.
  10. 10. Sample GRAT Results •Shareholder contributes 35% of company in non- voting shares to GRAT in February 2009 in exchange for an annuity of $166,788 per year for 5 years (5 year annuity payment at 2%). •New owner’s distributions (35% of $175,000) paid to old owner as partial funding of annuity. Difference between annuity value and distributions received paid in shares of stock (shares returned). •At end of 5 year period, new owner retains 13% ownership in company. •Zero gift, so no gift tax paid or exclusion used
  11. 11. Zero-Out GRAT Calculation
  12. 12. Zero-Out GRAT “Sweet Spot” • Low IRC 7520 interest rate • Income generates cash flow available to distribute without a net depletion to equity • No debt service in company • Equity growth (after distributions) greater than the IRC 7520 rate • Ability to justify a larger valuation discount
  13. 13. LarsonAllen LLP • Appendix – Information about LarsonAllen and LarsonAllen’s Construction and Real Estate Group
  14. 14. LarsonAllen Construction and Real Estate Group Nationally Oriented CPA & Business Consulting Firm Established in 1953 by Rholan Larson & John Allen History & Focus on Privately-Owned, Owner- Operated Businesses Primary Advisor Relationship – “Total Client Service” Managed by the “LEADERS” culture Ranked in the top 20 CPA firms in the U.S.; approximately 1,400 employees; 27 offices and client service centers in 9 states
  15. 15. LarsonAllen Locations Upper Midwest Minneapolis, St. Cloud, Austin, Alexandria and Brainerd, Minnesota Eau Claire, Wisconsin Midwest St. Louis, Missouri Dallas, Texas East Philadelphia, Pennsylvania Washington DC Boston, Massachusetts Southeast Charlotte, North Carolina Fort Myers, Naples, Orlando and Tampa, Florida Southwest Phoenix, Arizona In addition, there are ten client service centers.
  16. 16. Construction & Real Estate Group Construction and Real Estate industry commitment – Focus on industry knowledge and practice development Dedicated construction group staff of 100 professionals Firm-wide Specialized A&A and tax training for all staff and principals Construction industry association memberships and active involvement Serving construction and real estate clients ranging from startups to companies with revenues greater than $1 billion covering a wide variety & type of contractors and real estate entities.
  17. 17. Florida Construction and Real Estate Principals Naples Sue Christopher (Lead Florida Principal), schristopher@larsonallen.com, 239.280.3562 Stan Schneider, swschneider@larsonallen.com, 239.280.3566 Michael Kosinski, mkosinski@larsonallen.com, 239.280.3517 Orlando Les Eiserman, leiserman@larsonallen.com, 407.802.1203 Tampa Jack Rybicki, jrybicki@larsonallen.com, 813.384.2701 Fort Myers John Reed, jreed@larsonallen.com, 239.226.9903
  18. 18. Noticeably Different Construction Operations Consulting Information System Selection and Implementation Business Planning and Corporate Structure Management Training – Project Managers, Estimators, etc. Reporting Relationships Performance Measurement and Assessment Dispute Resolution Support Advisory/Devil’s Advocate Services Expert Witness Claims Documentation and Assistance Cost Segregation Services

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