Planning for a Great Finish: How Business Owners Finish Well

START ● PLAN ● ACT ● FINISH ● ENJOY
Plan to Finish Well

Where are we Now?
www.brownstonebusiness.com
41%
59%
Age of Owners
Under 50 Over 50

Where are we Now?
Yes - Ready
21%
No - Not Ready
79%
SUCCESSION READY?

Where are we Now?
81%
19%
Retiring in 10 years
Yes - Retiring
No - Not Retiring

Wealth Accumulation
Wealth Diversification
Wealth / Business Transition
65
Wealth Protection
25 35 55 75
Changes in Wealth Considerations

Putting Wealth at Risk
76%
72%
84%
PERSONAL
WEALTH DRIVEN
BY BUSINESS
DO NOT KNOW
BUSINESS VALUE
BUSINESS NOT
READY TO SELL
A Lifetime at Risk

Recipe for Disaster
 Fewer companies are transitioning to the “next” or
successor generation of managers and owners …
 Aging ownership population …
 Few owners have succession plans in place …
 A larger percentage of businesses are currently not
salable …
 WHAT CAN GO WRONG???

Likely Outcomes
 Owners lose the investment
value of their business …
 Families lose opportunities …
 Employees lose jobs …
 Domino effect

What are Your Options?
1. Internal Sale or Transfer
 Family Members
 Partners
 Management
 Employees
 Combination of the Above

2. External Sale or Transfer
• Strategic Buyer Within
the Industry
• Strategic Buyer in an Aligned Industry
• Financial Buyer

2. External Sale or Transfer
• RULE: 35 – 20 - 7
35% … are salable
20% … listed will sell
7% … of all businesses will sell

3. Keep it … growing trend
• Redefine your role in the business
• Enjoy a creative “partial” exit
• Benefit from insurance
• Stay mentally active

Three Possibilities – Business as an Investment
Active Partial Passive

4. Do NOTHING
“Doing nothing is the least logical, the most costly, the
most destructive of all options – yet it is by far the
most popular.”

The RESULTS of Doing Nothing
 The COURTS … not the owner (or family) will decide
the outcome
 Uncle Sam will get his maximum share of taxes
 Everyone else will pick up the remaining pieces

Why Owners Fail to Plan
Owners Managers Family

Owners
Managers
Family

 They don’t want to retire
 They struggle to disconnect from daily urgencies to
do long-term planning
 They are not aware of the benefits

Why is it so Hard?
There are Lots of Pieces in the Puzzle

A Comprehensive View
Primary Goals
Business
Strategy
Review
Management
Succession
Family Input
Business
Finance
Estate
Planning
Insurance
Analysis
Investment
Strategies
Shareholder
Agreement
Risk
Management
Corporate
Structuring
Business
Valuation
Retirement
Planning
Compensation
Planning
Business
Transfer
Techniques

Where do we Begin?

Strategy First
Strategy without Tactics …
… is the slowest route to victory.
Tactics without Strategy …
… is the noise before defeat.

Strategy First
Strategy
drives
tactics
as the
Play
drives
assignments

The Succession Strategy Process
Personal
Goals
Stakeholder
Goals
Business
Plan
Wealth Plan
Legacy
Planning
Family
Dynamics
Estate & Tax
Planning
Execute &
Revise

Personal Goals
Without goals, and plans to reach
them, you are like a ship that has set
sail with no destination … Dodson
The first step in creating your succession strategy is
to define the desired end result that encompasses the
owner’s personal goals and vision for the future of
the business.

Personal Goals
“Blueprint” for success … vision
… includes …
1. An image of the future state
of your business years from
now …
2. An image of what you hope to
add to your life as a result of
your succession plan …
3. The owner’s commitment to
making this a reality …

Stakeholder Goals
Stakeholders = Individuals significantly impacted by
the succession plan
Purpose of Including
 Owners can learn about their individual goals and
expectations
 All parties will feel a sense of ownership in the
planning process, greatly improving the likelihood of
its success

Business Planning
Goal: Bring each of the business planning elements
into a single coordinated plan.
Goals
Business
Financial
Risk
Value

Business Valuation
 Why assess the value a business?
 Estate and gift planning or compliance
 Establish a starting point
 Merger or acquisition
 Internal sale consideration
 ANSWERS THE QUESTION: HOW CLOSE AM I?

Business Valuation
Fair Market Value
Willing buyer, willing seller, both having knowledge of
all relevant facts and neither being under any
compulsion to buy or sell. Revenue Ruling 59-60.
Used For:
- Death - Litigation
- Gift - Divorce
- ESOP

Business Valuation
Investment Value
The value of a business to a particular buyer based
upon a return on investment analysis and the unique
circumstances of the transaction.
Used For:
- Purchase/sale transaction
- Buy/sell agreement

Personal Wealth Planning
It’s not only about the business …
The business succession strategy is not ONLY
about the business.
The process must also include:
 Preservation of individual wealth
 Financial security for owners and families
 Impact on other key stakeholders

Personal Wealth Planning
Retirement Planning … for business owners
1. Hard because …
 Relying on cash flow or sales proceeds
 Impacted by management succession
 Requires tax planning
 Determined by valuation and corporate finance

Legacy Planning
Three considerations …
Management
Succession
• Choosing a
Successor
• Founder’s
Role
Ownership
Transfer
• Transfer
Strategy
• Impact on
Succession
Shareholder
Agreement
• Triggering
Events
• Price &
Terms
• Funding

Legacy Planning
Management Succession …
1. Common Questions
 Does the successor want the job?
 Is the successor competent and willing to learn?
 Is the parent willing to let go?
 Are there other siblings?
 What about non-family managers?
2. Grooming Successors
 Who is responsible?
 What is needed?
3. Founder’s Role

Legacy Planning
Shareholder Agreements …
1. What happens if the owner dies?
 Does the family become a partner?
2. What happens with a disability?
3. What if an owner “quits” the business?
4. What is a fair buy-out price?
5. What are the terms of the buy-out?
6. What is the funding for the buy-out?

Legacy Planning
Non-Partner Buy-Sell…
1. Protects the business asset/value
 Identifying buyer and funding
2. Identify the buyer
 Key leader/manager
3. Create funding
 Usually insurance
4. Establish terms in agreement
Benefit: protected and preserved the value of the business for
the owner’s family in the event of a disabling situation.

The Succession Process – A Shift
Personal
Goals
Stakeholder
Goals
Business
Plan
Wealth Plan
Legacy
Planning
Family
Dynamics
Estate & Tax
Planning
Execute &
Revise

Estate & Tax Planning
One of the most significant issues in
business succession is the myriad of
taxes that can erode the value of your
life’s work.
 Without going deeply into estate strategies, there are
some that are fairly common

1. Keeping it in the family
 Selling to a family member
 Must arrive at a realistic, legally defensible value of the business
 Could potentially maximize taxation – purchase made with after
tax dollars
 At 34% tax bracket: business must make $1.52 to have $1 left to
purchase assets or stock

 Gifting Shares
 $13,000 annual gifting to heir and spouse
 Lifetime gift limit of $1,000,000 for owner and spouse
 Reduce the value of the shares by re-capitalizing business
 Reduced value for non-controlling shares
 Irrevocable Trusts
 Shift assets of the business owner out of the estate
 Supplemental Executive Retirement Plans (SERP)
 Provides income to the retired owner
 Is a liability to the company thereby reducing its value

 Family Limited Partnerships
 Useful for a long-term transfer of ownership
 Split the business into income – equity – control functions
 Sell or gift equity assets to successors
 Owner retains control
 Limited partnership units receive a greater discount
 Caution: do not be overly aggressive on the discount

Execute and Revise
 Knowing the Plan
 Set a time frame
 Know your personal goals
 Know your stakeholder goals
 Align your business to support your goals
 Work plan
 Metrics
 Strengthen your business to increase income/value
 Work plan
 Metrics
 Monitor and revise as needed

Execute and Revise
 Knowing the Team
Business
Owner
Succession
Advisor
Valuation
Financial
Planner
Estate
Benefits
Specialist
Business
Attorney
M&A Specialist
CPA
Business
Management
Insurance Investment

Next Steps
 Contact Information
Paul Brown
paulb@brownstonebusiness.com
509-926-6922

Self-test: Succession Readiness
On a scale of 1 – 10 with …
“1” meaning, “Nothing more than a thought (if that)”
and
“10” meaning, “It is written down and reviewed
regularly”

1 = Nothing 10 = Finished & Reviewed
1. I have defined my personal goals and vision for the
transfer of the ownership and management of my
business.
2. My successor has been identified and is in place
3. I have considered the importance of family
involvement in leadership and ownership of the
business
4. I am currently using techniques that will minimize
estate taxes
5. I have a “buy-sell” agreement in place

1 = Nothing 10 = Finished & Reviewed
6. I have enough liquidity to avoid a forced sale of my
business
7. I have a contingency plan to cover emergencies
8. I have considered the impact my corporate
structure will have on my succession goals
9. I know what my cash flow needs will be when I exit
my business
10. I know the value of my business and how much I
can expect to receive from it when I transfer it to
someone else

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