Succession Plan Executive BriefingStep 2 Step 3 Step 4 Step 5 Step 6 Step 7 ConclusionStep 1Overview

How Selling A Business Can Be Enhanced

by Creating A Succession Plan

by Joe Rodwell

Exit Planning LLC

www.ExitPlanningMN.com

www.LinkedIn.com/in/JoeRodwell

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“Top Exit Planning Experts from Across the Country”

Joe Rodwell Exit Planning LLC

(Only entry from Minnesota)

Boomer Market Advisor January 2007: p. 62

Succession Plan Executive Briefing

Every business owner will sooner or later sell a business, and very few are adequately prepared.

Exit Planning LLC was founded to help business owners create a written Succession Plan that will allow them to sell their businesses, or cut back significantly from day-to-day operations, under the most favorable conditions.

Why Succession Planning?

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Succession Plan Executive Briefing

Step 1 - Identify Exit Objectives Step 2 – Identify Business & Personal Financial Resources

Step 3 – Maximize and Protect Business Value

Step 4 - Sale to Third Parties

Step 5 - Sale to Insiders

Step 6 - Business Continuation

Step 7 - Personal Wealth & Estate Planning

The Seven Step Succession Planning Process™

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Succession Plan Executive Briefing

“When a man does not know which harbor he is heading for, no wind is the right wind.” Seneca, 59 B.C.

Step 1: Identifying Succession Plan Objectives

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Succession Plan Executive Briefing

Step 1: Identify Succession Plan Objectives

What is the exact date you plan to sell your business?

How much money – in cash – will you need each and every month after you sell your business?

Who do you want to own the business when you leave?• Family members• Other owners or Key Employees• Third Party

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Succession Plan Executive Briefing

Step 1: Identify Succession Plan Objectives

Characteristics of a Succession Planning Advisor Team

Owner selects Team Members

Demand experience in Succession Planning

Coordinated planning and action is key

Team members willing to work together

Owner’s Road Map is a written Succession Plan

Action Checklist is a guide for Advisor Team

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Succession Plan Executive Briefing

“Knowing where you are . . . helps map the destination.”

Step 2: Identify Business & Personal Financial Resources

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Succession Plan Executive Briefing

You must know the value, because to sell the business, you will need cash - from the business, and the business is generally the owner’s most valuable asset.

The owner and advisors need to know the current value of the business to determine if the owner’s financial objectives can be met at the present time.

What Is Your Business Worth?

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Step 2: Identify Business & Personal Financial Resources

Succession Plan Executive Briefing

The value of a business is based upon the perspective of the person valuing it and the reason for the value.

Maximum Value, also called Enterprise Value, is what most owners want to receive from sale to a third party.

Minimum Value, after applying a variety of legitimate valuation discounts, then called Lowest Defensible Value, is what most owners should choose to receive from Insiders for their ownership interest, which would not reflect the total value that they receive for sale of the business.

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Step 2: Identify Business & Personal Financial Resources

Succession Plan Executive Briefing

Step 3: Maximize and Protect Business Value

“From Good to Great.”

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1. Preserve value from needless taxation

2. Protect value from creditors

3. Maximize value through Value Drivers

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Step 3: Maximize and Protect Business Value

Three Components

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Benefits to Owner:

Reduce income taxes upon sale by 25 - 100% vs. no planning

Create ability to sell the business

Protect assets from potential business and personal creditors.

Increase business value and pre-tax earnings

Motivate and retain Key Employees

Step 3: Maximize and Protect Business Value

Succession Plan Executive Briefing

Step 3: Maximize and Protect Business Value

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Methods to Minimize Taxes

• Charitable Remainder Trusts (CRTs)

• Use of “lowest defensible value”

• Choice of entity: C versus S corporation

• Creation of multiple entities

• Employee Stock Ownership Plans (ESOPs)

• Qualified Plan Redesign

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“C” vs. “S” Asset Sale Comparison

Fair Market Value = $4,000,000

Basis of Assets = $1,000,000

Entity Status Corporate Tax Personal Tax Net Proceeds to Owner

“C” Corp $1,200,000 $550,000 $2,250,000

“S” Corp $0 $600,000 $3,400,000

Succession Plan Executive Briefing

Focus on before-tax earnings that reflect future income growth Develop operating systems that sustain before-tax earnings Document sustainability of before –tax earnings (EBITDA) Improve company performance measured by industry metrics Update facilities, equipment, and systems to state-of-the-art Pay down debt, manage inventories-recognize obsolete items Solidify and diversify customer base Implement strategies to grow the company Build a solid management team - incent team to perform.

Step 3: Maximize Value Through Value Drivers

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Succession Plan Executive Briefing

The Role of Key Employees Indispensable components of a valuable business are its top

employees.

Think about it – they are even more valuable than you are for purposes of creating value for your business.

Why? Because the more valuable you are to the business, the less value the business has when you leave it. So if you want to make your business more valuable, make yourself less valuable.

.

Step 3: Maximize and Protect Business Value

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Succession Plan Executive Briefing

Design of Incentive Plan

Increase profitability Increase business value Retain key employees Must contain a deferral – the retention of the key employee.

Step 3: Maximize and Protect Business Value

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Succession Plan Executive Briefing

Step 4: Sale to Third Parties

“The ideal path for many owners.”

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Benefits to Owner

Cash

Minimize financial risk of exit

Eliminate family succession issues

Quicker exit possible?

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Step 4: Sale to Third Parties

Succession Plan Executive Briefing

The primary factors in determining what a buyer is

willing to pay you for your business:

Future earnings before taxes that he/she expects to realize from the business (EBITDA) – most businesses are sold as a multiple of EBITDA.

The buyer wants to know the quality of your management team and whether they will remain when you leave.

The current and future state of your industry.

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Step 4: Sale to Third Parties

Succession Plan Executive Briefing

Maximum value is normally obtained when the business’s future looks the brightest and when market conditions are peaking, even though the owner may not be ready to sell.

Never state an asking price.

Sell through a competitive auctioning process involving multiple prospective buyers through business brokering.

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Step 4: Sale to Third Parties

Succession Plan Executive Briefing

Step 5: Sale to Insiders

“How to structure the transaction.”

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The Issues are Similar:

Taxes

Money: children, other owners, keyemployees have no money, so

most of the purchase must come from the future earnings of the company.

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Step 5: Sale to Insiders

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TAXES: Golf Unlimited, Inc.

Sale for MAXIMUM ValueDetermined by Your Appraiser

$1,000,000Cash Flow = $1,700,000

BUYER

$1,700,000-700,000

$1,000,000INCOME TAX

SELLER

$1,000,000-200,000

$ 800,000CAPITAL GAINS TAX

PAYMENT FOR BUSINESS

Conclusion: Few businesses can be successfully transferred when the IRS gets 50% or more of the available proceeds!

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Step 5: Sale to Insiders

So What’s the Answer?

Devise methods to maximize your income stream by minimizing taxation and preserve value from needless taxation.

Thus, you will need ordinarily to sell your ownership interest for the lowest (yes, lowest) defensible value. Then, obtain the income you need without subjecting the business net earnings to the double tax.

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TAXES: Golf Unlimited, Inc.

Sale for MINIMUM ValueDetermined by Your AppraiserDiscounted Value = $300,000+ NQ Deferred Compensation

BUYER

$450,000-150,000

$300,000

Cash FlowIncome Tax

SELLER

$300,000 + 835,000 NQDC- 60,000 Tax – 275,000$240,000 + $560,000

PAYMENT FOR BUSINESS $800,000

Succession Plan Executive Briefing

Maximum Value

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Comparison of Enterprise and Discounted Values

Sale for: $1,000,000

Requires:Cash Flow $1,700,000

Sale for: $300,000

Requires:

Cash Flow $450,000PlusDeductible business NQDC $835,000

Minimum Value

Required Cash Flow $1,700,000

Required Cash Flow $1, 285,000

How Valuation Methods Impact Cash Flow Requirements

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Step 5: Sale to Insiders

Additional Methods of Receiving Income:

If Real Estate is owned in another entity, lease payments of the highest defensible amount between that entity and the business (could be building as well as equipment)

Consulting Fees

Sub-S Distributions

Redesigned Qualified Plan Funding

Succession Plan Executive Briefing

Step 6: Business Continuation

“Making sure the business continues when the owner doesn’t.”

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The Continuation Agreement Controls the Transfer of Ownership when the Following Events Occur:

Death of an Owner

Permanent Incapacity (Total Disability) of an Owner

Retirement – you need cash to buy out an older owners

Termination of Employment

Bankruptcy

Step 6: Business Continuation

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The Continuation Agreement controls the Transfer of Ownership When the Following Events Occur:

Divorce – you or your children

Business Disputes Among Owners

When a triggering event occurs, parties may become adverse.

Step 6: Business Continuation

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Common Buy-Sell Agreement Problems

Valuation not reviewed regularly (or at all)

Value not clearly defined

Difference for “Enterprise Value” not addressed

Failure to cover all transfer events

No coordination of life insurance with value

Disability buy-sell coverage not addressed

Step 6: Business Continuation

Succession Plan Executive Briefing

Step 7: Personal Wealth & Estate Planning

“When the ‘slings and arrows’ of outrageous fortune befall you, fight back.” William Shakespeare (Hamlet)

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Succession Plan Executive Briefing

Benefits to Owners

Financial Security for Family

Treat Children Equitably, Not Equally

Address Estate Taxes

Complete New Estate Plan to Go with Exit Plan

Finalize Retirement Plan

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Step 7: Personal Wealth & Estate Planning

Step 7 Conclusion

Succession Plan Executive Briefing

There is only one way you, as an owner, can leave your business successfully – you must create a written Succession Plan as early as possible, revise it occasionally, and stick to the plan as long as you maintain your business.

Creating and implementing your Succession Plan can be the most important business and financial event in your life. Remember, you have only one chance to get it right!

Financial Professionals, like us, bring to the table knowledge and experience to help you create a written Succession Plan and help you get it right.

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Conclusion

Succession Plan Executive Briefing

A written Succession Plan

based on your objectives. An experienced team of

advisors to design and

implement the plan. Cash flow and a quantified business value. A strong management team in place. Time.

Ingredients of a Successful Sale

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