SALES OF FAMILY BUSINESSES: AN INTERDISCIPLINARY APPROACH, PART

1 & PART 2

First Run Broadcast: August 24 & 25, 2016

Live Replay: October 12 & 13, 2017 1:00 p.m. E.T./12:00 p.m. C.T./11:00 a.m. M.T./10:00 a.m. P.T. (60 minutes)

Planning for the sale of a family business necessarily involves both transactional planning and

estate planning – and the goals of these are sometimes in tension. Transfers to family members

can take many forms – a straight sale, a redemption using internally generated cash flow to cash-

out a senior generation, an estate “freeze,” and more. Sales to third parties can other forms, but

all involve special due diligence issues when the company has been long-controlled by a

family. Whether the businesses is transferred to family members or sold to third parties, the

specter of succession drama looms large, bringing to the forefront inter-personal family issues.

Layer on top of these business considerations the imperatives of estate planning, including

discounting the value of assets transferred, and the overall project becomes very complex. This

program will provide you with an inter-disciplinary guide to planning for the sale of a family

business.

Day 1 – October 12, 2017:

• Interdisciplinary business and estate planning for sales of family businesses

• Strategies to avoid family drama in succession planning – intra-family transfers & sales to third parties

• Special diligence issues when buying/selling family businesses

• Intra-family transfers – redemptions, freezes, straight sales

• Transactional formats for transfers to third parties – entity merger and asset sales

• Planning to retain key employees and transition agreements

• Finance issues – new capital, use of internal cash flow, debt financing

• Reps, warranties, indemnity and baskets – drafting issues common to closely held companies

Day 2 – October 13, 2017:

• Successor liability concerns where assets are transferred

• Valuation of family business & conflicting goals of sales v. estate planning

• Understanding range of estate/gift/income tax planning alternatives & circumstances when each is best

• Structuring private annuities to transfer a business and provide income to founders

• Self-cancelling installments notes and intentionally defective irrevocable trusts

• Use of GRATS and “redemptive freezes”

Speaker:

Paul Kaplun is a partner in the Washington, D.C. office of Venable, LLP where he has an

extensive corporate and business planning practice, and provides advisory services to emerging

growth companies and entrepreneurs in a variety of industries. He formerly served as an Adjunct

Professor of Law at Georgetown University Law Center, where he taught business

planning. Before entering law practice of law, he was a Certified Public Accountant with a

national accounting firm, specializing in corporate and individual income tax planning and

compliance. Mr. Kaplun received his B.S.B.A., magna cum laude, from Georgetown University

and J.D. from Georgetown University Law Center.

VT Bar Association Continuing Legal Education Registration Form

Please complete all of the requested information, print this application, and fax with credit info or mail it with payment to: Vermont Bar Association, PO Box 100, Montpelier, VT 05601-0100. Fax: (802) 223-1573 PLEASE USE ONE REGISTRATION FORM PER PERSON. First Name ________________________ Middle Initial____ Last Name__________________________

Firm/Organization _____________________________________________________________________

Address ______________________________________________________________________________

City _________________________________ State ____________ ZIP Code ______________________

Phone # ____________________________Fax # ______________________

E-Mail Address ________________________________________________________________________

Sales of Family Businesses: An Interdisciplinary Approach, Part 1 Teleseminar

October 12, 2017 1:00PM – 2:00PM

1.0 MCLE GENERAL CREDITS

PAYMENT METHOD:

Check enclosed (made payable to Vermont Bar Association) Amount: _________ Credit Card (American Express, Discover, Visa or Mastercard) Credit Card # _______________________________________ Exp. Date _______________ Cardholder: __________________________________________________________________

VBA Members $75 Non-VBA Members $115

NO REFUNDS AFTER October 5, 2017

VT Bar Association Continuing Legal Education Registration Form

Please complete all of the requested information, print this application, and fax with credit info or mail it with payment to: Vermont Bar Association, PO Box 100, Montpelier, VT 05601-0100. Fax: (802) 223-1573 PLEASE USE ONE REGISTRATION FORM PER PERSON. First Name ________________________ Middle Initial____ Last Name__________________________

Firm/Organization _____________________________________________________________________

Address ______________________________________________________________________________

City _________________________________ State ____________ ZIP Code ______________________

Phone # ____________________________Fax # ______________________

E-Mail Address ________________________________________________________________________

Sales of Family Businesses: An Interdisciplinary Approach, Part 2 Teleseminar

October 13, 2017 1:00PM – 2:00PM

1.0 MCLE GENERAL CREDITS

PAYMENT METHOD:

Check enclosed (made payable to Vermont Bar Association) Amount: _________ Credit Card (American Express, Discover, Visa or Mastercard) Credit Card # _______________________________________ Exp. Date _______________ Cardholder: __________________________________________________________________

VBA Members $75 Non-VBA Members $115

NO REFUNDS AFTER October 6, 2017

Vermont Bar Association

CERTIFICATE OF ATTENDANCE

Please note: This form is for your records in the event you are audited Sponsor: Vermont Bar Association Date: October 12, 2017 Seminar Title: Sales of Family Businesses: An Interdisciplinary Approach, Part 1 Location: Teleseminar - LIVE Credits: 1.0 MCLE General Credit Program Minutes: 60 General Luncheon addresses, business meetings, receptions are not to be included in the computation of credit. This form denotes full attendance. If you arrive late or leave prior to the program ending time, it is your responsibility to adjust CLE hours accordingly.

Vermont Bar Association

CERTIFICATE OF ATTENDANCE

Please note: This form is for your records in the event you are audited Sponsor: Vermont Bar Association Date: October 13, 2017 Seminar Title: Sales of Family Businesses: An Interdisciplinary Approach, Part 2 Location: Teleseminar - LIVE Credits: 1.0 MCLE General Credit Program Minutes: 60 General Luncheon addresses, business meetings, receptions are not to be included in the computation of credit. This form denotes full attendance. If you arrive late or leave prior to the program ending time, it is your responsibility to adjust CLE hours accordingly.

© 2016 Venable LLP

Selected Legal and Business Considerations

in Transfers of Ownership Interests in

Family Businesses

Paul Kaplun Venable, LLP - Washington, D.C.

(o) (202) 344-8535 ptkaplun@venable.com

Jennifer A. Pratt

Venable, LLP - Baltimore (410) 528-2883

japratt@Venable.com

mailto:ptkaplun@venable.commailto:japratt@Venable.com

© 2016 Venable LLP

Strengths and Weaknesses of the Family Business

Strengths

– Unified Family Goal of Establishing and Maintaining a Profitable Enterprise

– Continuing Commitment to the Long-Term Success of the Enterprise

– Clear Identity

Weaknesses

– Family Issues Bleed into the Work Environment

– Mismatch of Business Structure with Family Growth

– Managing Relationships Between Family and Non-Family

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© 2016 Venable LLP

Challenges Unique to the Family Business

● Tension between Family Interests and Shareholder Interests

● Illiquidity

● Resistant to Change

● Lack of Structured Decision-Making

● Succession Planning

● Establishing Reasonable Compensation

● Inability to Hire Qualified Individuals or to Terminate Current Employees

● Turnover Rate of Non-Family Employees

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© 2016 Venable LLP

Role of the Attorney Who Represents the Family Business

● Need for Transparency and Ongoing Communication/ Relevant Rules of Professional Responsibility

– Rule 1.13 – Organization as Client

– Rule 1.6 – Confidentiality of Information

– Rule 1.7 – Conflict of Interest

– Rule 1.2 – Scope of Representation

– Rule 1.4 – Communication

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© 2016 Venable LLP

Succession Planning

● Importance of Succession Planning in the Current Social and Economic Environment

● Coordinate with Estate Planning

● Recapitalization of Equity Interests

● Installment Sales

● Transfer of Equity Interests of Employees

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© 2016 Venable LLP

Succession Planning (cont’d)

● Participates in the Family Business

– Family Participants

Owner/Employee

Owner/Not an Employee

Not an Owner/Employee

Neither Owner nor an Employee

– Non-Family Participants

Owner/Employee

Owner/Not an Employee

Employee/Not an Owner

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© 2016 Venable LLP

Succession Planning (cont’d)

● The Process

Countervailing Forces

Initiating the Process

Selection of Successor

Training and Education

Role of the Founder Post-Transition

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© 2016 Venable LLP

Ten Key Succession Planning Elements

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• Retirement Planning

– Show me that I can afford to retire

– Sources of retirement dollars

• Passing Control and Equity - Can be non-voting equity

• Providing Income Security for Spouse and Dependent Children

© 2016 Venable LLP

Ten Key Succession Planning Elements (cont’d)

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• Equality Issues

– Many (but not all) grapple with issues related to “equality”

– “Active Child/Children” in the business versus “Inactive Child/Children”

– Active Child “earned” the right to receive the business?

– “Strict Equality” not in fact ever achievable:

―“Quality of Assets

$1M closely-held stock vs. $1M NYSE stock?

―Timing differences

– “Rough Equality” is only practical goal

– Does business have to help support Inactive Child/Children?

– Wide spectrum of possible value judgments

– Dad versus Mom – difference of opinion

© 2016 Venable LLP

Ten Key Succession Planning Elements (cont’d)

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• Key Employee Compensation

– Children need help and loyalty of Dad’s senior colleagues

– Compensation Techniques

―Pure cash bonus

―Deferred compensation agreement

(paid at retirement)

―Transfer of non-voting stock with mandatory repurchase upon certain events

―Phantom stock plan

―Bonus life insurance plan

© 2016 Venable LLP

Ten Key Succession Planning Elements (cont’d)

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• Buy-Sell Agreement

– Essential to prevent stock from ending

up in wrong hands

– Never transfer equity ownership without buy-sell in place as to that stock

– Family Member or Key Employee

– At a minimum: one-way option in Company to reacquire stock

―Death, disability, employment termination

– Section 2703: FMV must be used

• Liquidity Planning – Use of life insurance

• Minimize Taxes

• Valuation – Complex planning area, new 2704 Regulations

• Possible Bonding Issues, or other specialty issues for type of business

© 2016 Venable LLP

Options for Passing on the Closely Held Business

• Liquidate (either before or after death of the business owner). This is the decision not to continue the

business, and it is the correct decision in some circumstances.

• Outside Sale: Sell to outsiders (either before or after death of the business owner). “Outsiders”

means non-family members and individuals who are not existing Key Employees.

• Continue the business as a going concern to family members, or Key Employees, or a combination of

both. “Continuation” can take the form of an “internal sale,” or the form of a gift, or a combination. An

“internal sale” is often the best way to maximize the value back to the business owner. “Internal

sales” usually involve to a significant extent the phenomenon of: “B Y O W Y O $.” (Buy Your Own

Way, Your Own Dollars).

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© 2016 Venable LLP

State of the Sales Market and Valuation Implications

● Assessment of the Current and Intermediate Economic and Tax Environment

Uncertainty of Tax Reform

Outcome of November 2016 Election

Valuations for Businesses and Assets

Availability of Credit

Sustainability of Low Interest Rates in the Short-Term

Prospect of Inflation in the Long-Term

● Buying/Selling Considerations

Types of Buyers

Financial Investors

Strategic

Management

Family

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© 2016 Venable LLP

State of the Sales Market and Valuation Implications (cont’d)

● Competitive Position of the Business within the Industry

● Attractiveness of Industry Generally

● Structure of Transactions

Risk Retention

Earnouts

Escrows

Retention of Equity

● Need for/Lack of Liquidity

● Accounts Receivable and Credit Issues

● Federal and State Income, Gift and Estate/Inheritance Tax Planning and Assessment of Tax Rates

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© 2016 Venable LLP

Overview of Timeline and Process for Third Party Sales

● Length of the Process

● Understanding the Economic Interests of Owners, Directors, Management and Employees

● Special Committee of the Board of Directors

● Retention of Financial Adviser

● Engaging Legal Counsel and CPA

● Identify and Qualify Potential Buyers

● Stability of Management Throughout the Process

● Confidential Information Memorandum/Confidentiality Agreement/Due Diligence/Data

Room/Management Presentations

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© 2016 Venable LLP

Overview of Timeline and Process for Third Party Sales (cont’d)

● Acquisition Agreement

Key Terms

MAC Clauses

Breakup Fees

Financing

Contingent Consideration

D&O Insurance Coverage

Indemnity Caps and Baskets

Post Closing “True-Up” Calculations

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© 2016 Venable LLP

Integration With Estate Planning

● Pre-Acquisition Gift Planning

● Timing

● Use of Discounts

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© 2016 Venable LLP

Restructuring for Sale to Third Party and Retention of Key Family

Members

● Elimination of Redundant and Nonperforming Assets

● Spinoffs and Drop Downs of Assets and Businesses

● Adjustments/Modifications to EBITDA

● Balance Sheet and Working Capital Management

● Operational Initiatives

● Alignment of Management Roles and Creating Financial and Professional Incentives

● Balancing of Family Objectives and Responsibilities

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© 2016 Venable LLP

Sales Techniques

● Third Party Sales

● Recapitalizations

● Management Buyouts

● Sales to Employee Stock Ownership Plans

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© 2016 Venable LLP

Major Components

• Ownership Transfer Plan – What is the timetable for the ownership/equity to be transferred?

• Management Succession Plan – What is the timetable for business owner to give up operational

control of business decisions?

• Contingency Plan – What happens to management power and equity ownership is business owner

dies suddenly and prematurely?

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Sales of Family Businesses: An Interdisciplinary Approach, Part 1 & Part 2Registration Forms, Part 1 & Part 2Certificates of Attendance, Part 1 & Part 2Materials