planning for a great finish: how business owners finish well
DESCRIPTION
Business Succession for owners requires a comprehensive view of the major factors impacting a successful transition. Brownstone has created such a model that has helped hundreds of owners, partners and families complete their succession and enjoy the rewards of the years they have invested in their business.TRANSCRIPT
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START ● PLAN ● ACT ● FINISH ● ENJOY
Plan to Finish Well
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Where are we Now?
41%
59%
Age of Owners
Under 50 Over 50
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Where are we Now?
Yes - Ready21%
No - Not Ready79%
Succession Ready?
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Where are we Now?
81%
19%
Retiring in 10 years
Yes - RetiringNo - Not Retiring
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Wealth Accumulation
Wealth Diversification
Wealth / Business Transition
65
Wealth Protection
25 35 55 75
Changes in Wealth Considerations
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Putting Wealth at Risk
Personal Wealth Driven by Busi-
ness
Do NOT Know Business Value
Business NOT Ready to Sell
76%
72%
84%
A Lifetime at Risk
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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???
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Likely Outcomes
Owners lose the investment value of their business …
Families lose opportunities …
Employees lose jobs …
Domino effect
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What are Your Options?
1. Internal Sale or Transfer
Family Members Partners Management Employees Combination of the Above
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What are Your Options?
2. External Sale or Transfer
• Strategic Buyer Within the Industry
• Strategic Buyer in an Aligned Industry
• Financial Buyer
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What are Your Options?
2. External Sale or Transfer
• RULE: 35 – 20 - 7
35% … are salable20% … listed will sell7% … of all businesses will sell
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What are Your Options?
3. Keep it … growing trend
• Redefine your role in the business
• Enjoy a creative “partial” exit
• Benefit from insurance
• Stay mentally active
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What are Your Options?
Three Possibilities – Business as an Investment
Active Partial Passive
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What are Your Options?
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.”
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What are Your Options?
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
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Why Owners Fail to Plan
Owners Managers Family
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Why Owners Fail to Plan
Owners
Managers
Family
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Why Owners Fail to Plan
They don’t want to retire They struggle to disconnect from daily
urgencies to do long-term planningThey are not aware of the benefits
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Why is it so Hard?
There are Lots of Pieces in the Puzzle
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A Comprehensive View
Primary Goals
Business Strategy Review
Management Succession Family Input
Business Finance
Estate Planning
Insurance Analysis
Investment Strategies
Shareholder Agreement
Risk Managemen
t
Corporate Structuring
Business Valuation
Retirement Planning
Compensation Planning
Business Transfer
Techniques
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Where do we Begin?
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Strategy First
Strategy without Tactics …… is the slowest route to victory.
Tactics without Strategy … … is the noise before defeat.
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Strategy First
Strategy drives tactics
as the
Play drives
assignments
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The Succession Strategy Process
Personal Goals
Stakeholder Goals
Business Plan
Wealth Plan
Legacy Planning
Family Dynamics
Estate & Tax
Planning
Execute & Revise
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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.
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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 …
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Stakeholder Goals
Stakeholders = Individuals significantly impacted by the succession plan
Purpose of IncludingOwners can learn about their individual goals
and expectationsAll parties will feel a sense of ownership in
the planning process, greatly improving the likelihood of its success
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Business Planning
Goal: Bring each of the business planning elements into a single coordinated plan.
Goals
BusinessFinancial
Risk
Value
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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?
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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
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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
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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 wealthFinancial security for owners and familiesImpact on other key stakeholders
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Personal Wealth Planning
Retirement Planning … for business owners1. Hard because …
Relying on cash flow or sales proceeds Impacted by management succession Requires tax planning Determined by valuation and corporate
finance
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Legacy Planning
Three considerations …
Management
Succession• Choosing
a Successor
• Founder’s Role
Ownership Transfer
• Transfer Strategy
• Impact on Succession
Shareholder
Agreement• Triggerin
g Events• Price &
Terms• Funding
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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
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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?
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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.
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The Succession Process – A Shift
Personal Goals
Stakeholder Goals
Business Plan
Wealth Plan
Legacy Planning
Family Dynamics
Estate & Tax
Planning
Execute & Revise
Tactical
Practical
Personal
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Estate & Tax Planning
One of the most significant issues in business succession is the myriad oftaxes that can erode the value of yourlife’s work.
Without going deeply into estate strategies, there are some that are fairly common
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Estate & Tax Planning
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
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Estate & Tax Planning
1. Keeping it in the family 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
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Estate & Tax Planning
1. Keeping it in the family 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
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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
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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
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Next Steps
Contact Information
Paul [email protected]
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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”
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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
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1 = Nothing 10 = Finished & Reviewed
6. I have enough liquidity to avoid a forced sale of my business7. I have a contingency plan to cover emergencies8. I have considered the impact my corporate structure will have on my succession goals9. I know what my cash flow needs will be when I exit my business10. I know the value of my business and how much I can expect to receive from it when I transfer it to someone else