The document outlines a roadmap for business succession planning and exit strategies. It discusses transferring ownership to employees through an ESOP or to future generations. The presentation covers evaluating financial performance, establishing an exit plan, and addressing critical issues like leadership, ownership transfer, and management succession to help businesses successfully transition to new ownership.

1. WHAT’S YOUR BUSINESS EXIT STRATEGY?
A Road Map to Successful
Succession Planning

2. What We’ll Cover
Overview of the succession planning roadmap
First Stop: Transferring to long-term employees via ESOP
Second Stop: How to perpetuate your business for the next
generation
Last Stop: Financial best practices

3. Today’s Presenters
Bob Pedersen
VP, Relationship Manger
American River Bank
Kurt Glassman
Co-Founder
Leadership One, The
Capital Region Family
Business Center and the
Family Business Association
Kevin Long
Attorney at Law &
Taxation Law Specialist
Chang Ruthenberg & Long

4. THE ROADMAP
An Overview

5. Succession Planning
vs. An Exit Plan
A Business Succession Plan provides both an exit strategy and an
implementation plan for business owners and their families to
ensure the survival of the company with a transition or sale. It
plans for unanticipated events – the strategic and tactical options.
An Exit Plan helps secure and solely maximizes the financial
future of the business owner, the spouse and family, when the
owner chooses to exit the business, becomes disabled, or
passes away. Timing is everything; and size matters.

6. Why is it Important?
Ownership Will Transfer: Voluntary or
Involuntary
Not “Necessarily” All About the Money
Individuals Will Expire, Companies and
Families Can Live Forever.
Living Plan Not An Estate Plan

7. Four Basic Options
Sale or Succession During Life
Sell/Gift to Family
or Heirs
Sell to Employees, Key
Management or ESOP
Sell to Outsider-
Strategic Investor
Orderly Liquidation
or Recap
Minimize Estate Taxes

8. Alternatives for Divesting
Private Company Stock
 There are specific benefits and drawbacks
to each alternative
 Understand your objectives and select the
alternative that optimizes them – financial
and non-financial – so as to avoid “Seller’s
Remorse”
 Many times business owners are unaware
that an ESOP is even an option!

9. Benefits of Planning
Clarifies Uncertainty
Antidote for Anxiety
Promotes Communication
Builds Trust
Family Harmony

10. Obstacles To Planning

11. The Process

12. What are you really
looking for in an exit?
Option A: $how me the money!
Option B: I want to get a good buyout price, but…
…I am not ready to retire yet
…I want to keep my company independent and perpetuate a legacy
…I want to sell only a portion of the company and maintain control
…I’m tired of paying taxes!
…I don’t want to be beholden to a new owner /investor
…The other shareholders are not ready to sell
…I want to protect my employees

13. Questions to Ask
Yourself
What Do I Value?
Where Am I Going?
What Do I Want To Change?

14. Challenges
 Alignment
Ownership Transfer Plan
Governance Structure
Management Succession Plan
 Changing Conditions
 Relationships
 Trust

15. Advisors
Attorney CPA Banker Family
Business
Advisor
Wealth
Adviso
r
Appraiser

16. 1ST DESTINATION
Intelligent Succession and
Liquidity Strategies for
Closely Held
Businesses

17. Background: A Brief History

19. Most Common Industries

20. Notable Employee Owned
Company Employees
144,000
55,000
18,000
9,200
9,000
8,400
7,000
1,500
400
200
Company Employees
11,500
7,000
4,000
3,000
2,600
2,400
1,500
1,500
600
200
Companies

21. Myths And
Misunderstandings
 An ESOP is a giveaway
 I will lose control of my company
 You must disclose all financial data to employees
 My employees cannot pay me what my business is worth
 My employees are not interested in an ESOP
 ESOPs are for failing companies
 ESOPs are too expensive
 My CPA can advise me on this
 The ESOP must replace all retirement plans
 The ESOP's stock repurchase liability will kill the company

22. General Minimums
for an ESOP
 $5M in Revenues
 20+ employees
 EBIDA greater than $1.5M/year last five years
• (adding back owners salaries)
• Tax Burden is the Driver

23. ESOP Appeal To
The Owner/Seller
Deferral of capital gains tax on sale to ESOP
Can create a partial or 100% tax free ESOP company
Retain participation or control during the sale
Can do partial sales – whenever you are ready
A known buyer – with controlled earn out
Tax subsidy can cover more that 30% of the cost
Doesn't impede a later strategic transaction

24. ESOP vs. Non-ESOP
Transactions Seller’s
Perspective
Asset Stock §1042
Sale Sale Sale
Gross Sale Proceeds $ 20,000,000 $ 20,000,000 $ 20,000,000
Corporate Taxes Due (6,000,000) - -
Individual Taxes Due (4,620,000) (6,600,000) -
Net After Tax Sales Proceeds $ 9,380,000 $ 13,400,000 $ 20,000,000
Note: Assumes $5,000,000 cost basis in corporate assets and no cost basis in stock.
in stock. CA & Fed combined corporate tax rate = 40%. CA & federal combined capital gains rate = 33%.

25. Leveraged Buy-Out Seller Financing
3. Annual
Contributions
Deducted As
Pension Expense
Selling
Shareholder
Seller Taxed On
Installment Sale Basis
1. Stock
2. Cash And Note
4. Loan Repayment
Selling
Shareholder
Shares Allocated
As Loan Is Paid
Pension Expense
Matches Loan
Amortization

26. Bank Financing
1. Loan
2. Loan
7. Loan Repayment
(Principal & Interest)
6. Annual
Contributions
Bank /
Lender
Selling
Shareholder
QRP-Stocks &
QRP-Stocks &
Bonds
Bonds
4. Stock
3. Cash Purchase
5. Reinvest Cash
8. Loan Repayment
(Principal & Interest)
Bank /
Lender
CCoommppaannyy
ESOP TRUST
Suspense Account
Allocation
Participant
Accounts
Selling
Shareholder

27. Tax Deferred
"Rollover" ESOPs
IRC §1042
Capital gain on sale to the ESOP is deferred
Seller must reinvest proceeds within 12 months of
sale date in Qualified Replacement Property (QRP)
Can do partial or complete deferral of sales proceeds
ESOP must own at least 30% of company

28. Qualified Replacement
Property
Congress' intention: Incentivize owners of private companies who
sell to an ESOP to reinvest into corporate America
Eligible1
• Common Stock
• Convertible Bonds
• Corporate Fixed Rate
Bonds
• Corporate Floating Rate
Notes (FRN)
Not Eligible1
• Municipal Bonds
• U.S. Government Bonds
• Mutual Funds
• Foreign Securities
• REITs
• Bank CDs
1 Eligible issuer must have: More than 50% of its assets used in the active conduct of
a trade or business No more than 25% of its gross income from passive sources

29. S Corp. ESOPs –
Generally
S Corps. are pass-through entities
ESOP is qualified trust, exempt from taxation
Taxable income flows through to ESOP
Percentage owned by ESOP is tax exempt
ESOP may be minority or up to 100% owner
Benefits paid in cash only – not stock

30. When Is Private Equity A
Good Succession
Alternative?
Business has solid and consistent
cash flow
Business has solid growth prospects
Capable and experienced
management team
Limited customer concentration or
other business risks
Willingness to sell or recapitalize the
business in 5 +- years
SAME
SAME
SAME
or can develop over time
SAME
NO! No need to be hemmed
in! ESOP allows later sale, but
does not dictate timing!

31. Private Equity ESOP
Pros And Cons
Pros
 Many flexible structures
 Partner with smart, experienced people
 Can provide vehicle for immediate or
staged liquidity
 Can provide owner liquidity, while
allowing existing management to
maintain management control of the
company
Cons
 More expensive than bank financing
 Need to provide liquidity in 5+- years
 May have senior class of securities
(Preferred Stock) w/ certain rights
 Same – over 20 different templates
 Bring in outside talent, if you want it
 Staged liquidity via financing
 ESOP does not control the company –
management does
 Not as expensive as PE
 No requirement for a liquidity event – but
it does happen – you control it
 ESOP will never be superior to your
stock rights

32. ESOP v. Private Equity
The Bottom Line
Private equity is real cash – not debt
You are adding someone to your board – can you get
along? Can you replace them?
You are selling control – now or in five years
Unless you do an ESOP in five years

33. Impact On Shareholder's
Goals, Objectives
Description ESOP Company Private Equity Strategic Buyer
Maximize Sale
Value
Appraised Fair
Market Value
Negotiated Value Negotiated Value
Retain Control Yes Not if a 100% sale;
temporary if a
minority sale
No
Family Controlled
Involvement
Short term Typically not
Legacy Yes No No
Employment Until negotiated
to retire
Until company is
sold
Short term
contracts
Pass Business
to Employees
Yes Management kept
in place
Consolidation of
workforce
Estate
Liquidity
Over time Yes; in part or
whole
Yes; for cash
component of sale
Tax Impact Potential Cap gain
deferral
Taxable Taxable (unless
merger)

34. 2ND DESTINATION
Perpetuate your Business
for the Next Generation

35. If What a Business Wants is…
79% of Senior-Generation Members Want Their
Families to Retain the Family Business.
70% of the Next Generation Share These Hopes.
Then Why…
Do Only 30% of Family Businesses Make it to the
Second Generation?
Do Only 10% of Family Businesses Make it to the
Third Generation?

36. Breakdown Factors
 Traditional Assumptions:
– Inadequate Planning
– Poor Management
Performance
– Estate Tax

37. Dynamics

38. Business Transition vs
Succession Planning
Multi-dimensional approach that addresses the
needs of the business owner
Systematic Approach to Help CEO’s Build
“Stakeholder” Value
The Seven Critical Issues

39. Seven Critical Issues
1. Leadership
2. Relationships
3. Ownership Transfer
4. Business Strategy and Execution
5. Management Performance And
Succession
6. Financial Performance
7. Personal Financial Planning

40. 1. Leadership
Effective Leaders Adapt
Leadership is Cultural
Leaders Execute
Leaders Listen

41. 2. Relationships
“How Do We Get Along”
Need to Understand and Manage Conflict
The Conduit for Business

42. 3. Ownership Transfer
Can We be Fair and Equitable to All Our
Children?
Differences between Ownership and
Management
Need to Align Ownership, Governance and
Management Succession Plans

43. 4. Business Strategy
and Execution
Where Are We Going? (Vision)
Why Do I Want To Go There? (Mission)
How Do I Measure Success? (Goals)
What Are We Going To Do? (Action Plan)

44. 5. Management
Performance &
Succession
Do My People Know the Plays?
Do I Have the Right People on the Bus?
No Plan to Recruit, Retain, Reward and Retire
Key Employees

45. 6. Financial Performance
Do You Know Your Key Performance
Indicators (“KPI’S”)?
Do Your People Know Their Numbers?
Are You Hitting Your Numbers?

46. 7. Personal Financial
Planning
Income Continuity
All My Eggs Are In One Basket
How Do I Limit My Personal Guarantees?

47. 3RD DESTINATION
Financial Best Practices

48. Quality of
Financial Reporting
Think like an airline pilot on instruments
Treat family like a 3rd Party Buyer
Accuracy of Information is Paramount!
– Full Disclosure of your business (w. bad)
– Second (first) opinion of your trusted advisors –
CPA/Banker/Attorney
– Confidentiality Agreements & Common $

49. Show Me the Money
Spreadsheets of Data is NOT boring
Create value through ‘event planning’
Three years / year to date data
All reports – AR, AP, Backlog, Debts
Confidentiality /Sharing Data
– For outside buyers/employees
– Share information ‘as needed’
– Use common sense / plan for the worst

50. Business Debt
Capacity – A Short List
Liquidity (of company & owners)
True Value of Assets
Intangible Value – yes and no
Leverage and Debt Load
Management Quality & Track Record of New
Family Members/Owners is very important

51. What’s it Really Worth?
Valuation of companies for:
– Internal purposes
– Tax Purposes
– Borrowing/Bank Purposes
The Highest Value is not necessarily the Best value
Work with experts – business/equipment/real estate

52. Financing Options &
Taxes
Private Financing – Good & Bad
Commercial Bank Lending /Leverage
– ESOP Loans – yes/experience counts
– Government Guaranty Programs
Separate Real Estate from the Business Assets
– Sale/Leaseback of Property, etc.
– Trusts and real estate income

53. Key Take-Aways
 Ownership in your business will transfer: Voluntarily or Involuntarily
 Your business is the biggest asset and source of income you own – protect it
with “succession planning insurance”
 Having a written plan is key to successful transfer of control of your
company
 Your family & employees want your legacy to succeed as much as you do
 ESOP’s and other ownership plans can provide tax advantaged strategies to
the owner/seller
 There are many options – explore them all with your advisors
 Most business owners are doer’s – it’s normal to avoid dealing with
succession planning/training
 There are seven critical issues to confront
 Others have done this successfully – there is a formula

54. Let’s Continue The Conversation
Kurt Glassman Kevin Long
LeadershipOne Chang Ruthenberg & Long
(916) 923-0245 (916) 294-3262
kglassman@leadershipone.net KGL@Seethebenefits.com
Bob Pedersen
American River Bank
(916) 231-6138
bpedersen@americanriverbank.com