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How To Exit Your Business In Style Donald S. Feldman CExP™, CPA, CVA, ABV, MBA Keystone Business Transitions, LLC Presented by:

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1 How To Exit Your Business In Style Donald S. Feldman CExP™, CPA, CVA, ABV, MBA Keystone Business Transitions, LLC Presented by: May 1, 2014

2 – Like retirement planning for business owners Major asset is complex, illiquid business; Must understand business owner’s goals, personal financial situation, strengths & weaknesses of business, exit alternatives; Culminates in written report detailing how business owner can accomplish his or her goals. What is Succession/Exit Planning?

3 Typical Goals: Achieve financial security for retirement. Preserve your business legacy. Preserve the jobs of your employees. Pass wealth to your family. Establish a significant charitable legacy. Preserve family harmony. Why Plan? To Accomplish your Goals

4 Succession Planning Transactions are Risky Business. 65% - 75% of business owners want to transfer their business to a family member or key employee – only about ½ of these succeed. (PwC 2007) 80% of businesses with $50MM in revenue don’t sell. (Wells Fargo 2012) No comparable statistics for management buy-outs or family succession, but high rates of failure for these as well. To Avoid Failure Lots of business succession transactions fail – big part of the reason is lack of planning. Why Plan?

5 Elements of a Plan Identify Objectives – When to exit? To whom to transfer business? Transfer wealth to children? Charitable objectives? Quantify Resources – Liquid assets + value of business – enough to support you during retirement? Maximize and Protect Business Value – Review business operations, motivate and retain key employees. Plan for increasing business value? Ownership Transfer to Third Parties – Is the business saleable? Can the business survive due diligence? Tax planning. or Ownership Transfer to Insiders – Plan to avoid high tax cost; leadership transition planning. Business Continuity – Plan for business to survive the death or disability of owner. Personal Wealth and Estate Planning – Integrate business plan with estate plan.

6 What Prevents Owners From Taking Action Source: BEI’s North American Business Owner Survey, 2014

7 1.Sale to a Third Party 2.Sale to Insiders – Family, Key Employees, Co-owners 3.Sale to an ESOP – Employee Stock Ownership Plan 4.Liquidation 5.Recapitalization 6.Dying With Your Boots On Exit Alternatives

8 Business Owner’s Timeline

9 Must understand the value of the business – Business value must be transferable – if dependent on the efforts of the owner, not worth much to someone else. Motivate and keep key employees – build management team and groom successor(s). Improve financial performance. Plan to reduce income taxes upon sale of business. Protect assets from potential business and personal creditors – use separate entities. Plan to survive buyer due diligence. Intangible assets – trade names, licenses Inventory valuation Good business systems & financial controls in place Understand how legal rights can be transferred – distribution agreements, leases & contracts Getting the Business Ready

10 Getting the Owner Ready Is Owner emotionally ready to get out? o What is life after the sale going to look like? Does the owner have the right team of advisors in place? o Not for do-it-yourselfers Is the Owner financially ready to sell? Retirement plan Financial plan Estate plan Shareholders agreement

11  Choosing a Successor Must understand the consequences  financial  business operations  family  employees  your legacy  The First Critical Decision

12 Owners’ Choice of Successor Source: BEI’s North American Business Owner Survey, 2011

13 Choosing a Successor – Sale to Insider Usually insiders don’t have any cash If financed by seller, greatly increases seller’s risk Usually can only obtain bank financing after buyer has run business for several years as minority owner. Usually insiders can run the business. Poorly understood problem – Employees don’t always want to be owners. Potentially very high tax cost. Typical payout over 3 – 7 years.

14 Ownership Transfer to Insiders Problem for Insider Transfers: Insiders rarely have the cash to buy the business outright. Usually, most of the cash for insider sale comes from the business. Classic example is installment sale: Inside buyer purchases stock for a note, uses cash flow from the business to make note payments. This will result in double taxation without proper planning

15 Ownership Transfer to Insiders Minimize two levels of tax: Deferred compensation to selling owner – pay portion of company value out as ordinary income; Use valuation discounts to dramatically reduce value of minority stock interest – sell e.g. 30% over three years then use bank loan to finance remaining stock. Pay seller deferred comp. Alternatives to Installment Sale

16 Other strategies using qualified retirement plans – cash to owners with minimum tax: Cross Tested profit sharing plan Defined benefit plan ESOP o Partial sale to ESOP, partial sale to key employees o Key benefit of S corp ESOP sales:  “Deductible” note payments on leveraged ESOP  Interest owned by ESOP not subject to income tax. Ownership Transfer to Insiders

17 Other highly tax efficient techniques: o Stock bonus  Frequently used to transfer initial ownership to insider – corporate deduction, income to recipient.  Can also use qualified / non-qualified options. o Defined Benefit Qualified Plan  Owner’s buy-out can be partly in this form in the right circumstances

18 Can junior run the business? Should kids not in the business have ownership? If two or more children in the business, can they cooperate after the senior generation is out of the picture? Are dad and/or mom pressuring the kids to stay in the business? Twin dangers: family considerations interfere with the business, and business considerations ruin the family. Choosing a Successor – Family Members

19 Key advantages: – Significant % of cash at closing (usually some seller financing or earn-out). – No family/employee succession issues. – Ability to sell and business value are determined by: o Intrinsic Value: projected future cash flow. o Extrinsic Value: the value the market places on the business depends on market cycles. – Effectiveness of the sale process (use of transaction intermediary) – Speed of exit. Choosing a Successor – Sales to an Outsider

20 Is business positioned to be sold to an outsider? o Need sustainable, transferable cash flow. o Can business withstand buyer due diligence? o Is there a management team in place that will stay with the company after transfer of ownership? Who are likely buyers – larger competitors? Suppliers/customers? Private equity groups? Private investor? Value of the business will be different to different types of buyers. Must have realistic understanding of value o Obtained from valuation, SWOT analysis, realistic growth/business plan. Sales to an Outsider (cont)

21 A written Exit 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 Exit

22 Characteristics of Exit Planning Team Experience Owner selects Team Members Critical Specialties (will depend on particular circumstances): o Valuation o Legal o Accounting o Financial Planning o Qualified & Non-Qualified Plan design o Transaction Intermediary

23 Why Use Keystone Business Transitions? Objective – We don’t take commissions. No financial incentives for one exit route rather than another. Experience – We’ve guided more than fifty business owners through the process. Our greatest satisfaction is to see you through a successful transition.

24 Donald S. Feldman, CExP™, CPA, CVA, ABV, MBA Keystone Business Transitions, LLC 901 Rohrerstown Road Lancaster, PA Thank You for Your Participation


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