I NTERNAL ● T RANSFERS 1 Internal Transfers Convert ownership into financial independence … an inside view

I NTERNAL ● T RANSFERS 2 Business Transfer Spectrum

I NTERNAL ● T RANSFERS 3 Owner Transfer Motives Private owners want to: ● Create a family legacy ● Change lifestyle ● Empower employees ● Diversify estate and “equalize heirs” ● Give to charity ● Use transfer to create liquidity ● Leave door open to possible future external transfer

I NTERNAL ● T RANSFERS 4 Transfer Market Timing Ten Year Transfer Cycle Deal Recession Prime Selling Time Almost Recession (Buyer’s Market) (Seller’s Market) (Neutral Market)

I NTERNAL ● T RANSFERS 5 The Choice of Transfer Method Matters ●Employee Stock Ownership Plans (ESOPs) and most estate planning methods select fair market value ●Management Buyouts select investment value ●Phantom stock and co-owner transfers select whatever the creators dictate

I NTERNAL ● T RANSFERS 6 ESOPs ●Employee Stock Ownership Plans are defined- contribution, tax-qualified plans ●ESOPs can borrow money to buy stock of a private company. (P&I on loan is tax deductible to company) ●Owners can sell part or all of the stock to an ESOP on a tax-deductible basis (no capital gains if > 30% for a C corporation) ●Can be sold in stages (multiple transactions)

I NTERNAL ● T RANSFERS 7 ESOPs (Cont’) ●C or S corporation ●S corporation must be > 50% but no income tax on profit going forward. (Trust is a non-taxing entity) ●Combined with executive compensation plan allows management to earn stock outside the plan ●Owners can sell 100% of their stock in stages ●Owner remains in control and takes a salary until retirement ●Value world: Fair market value

I NTERNAL ● T RANSFERS 8 ESOPs – Points to Consider The Good: Tax deferral to the Seller; Chips off the table; Minority can get out; Cash flow of company increases; Empowers employees; Remain in control; Investment income replaces salary; Acquire competition tax advantaged To Consider: Dilution to owner outside the ESOP; Disclosure to employees; Annual valuations; Repurchase obligation; Added leverage; Added complexity

I NTERNAL ● T RANSFERS 9 Management Transfers ( MBOs/MBIs) ●Management Buyouts (MBOs) – existing management team acquires ●Management Buyins (MBIs) – outside team acquires ●Engineering the deal (capital structure is key) Senior; Junior; Notes; Warrants; Factoring; Deferred Compensation ●Value World: Investment value (Owner value would be nice)

I NTERNAL ● T RANSFERS 10 Mgt. Trans.– Points to Consider The Good: Management is knowledgeable of the business; empowers employees; informs them of your intent; you can remain on the BOD To Consider: Owner loss of effective control; dependent on future corporate cash flow; subject to market interest rates; business is bought with “after tax dollars”; added leverage; financial ties to the company

I NTERNAL ● T RANSFERS 11 Phantom Stock ● Focus management on value growth ●Create “golden handcuffs” for qualified management ●Used to attract and retain quality management ●Retain ownership of stock ●Change in control provision (pays management on sale) ●You control vesting schedule for each individual ●Value world must be consistently applied

I NTERNAL ● T RANSFERS 12 Phantom Stock– Points to Consider The Good: Retain ownership of stock; Motivates management; Based on incremental future value growth; Attract and retain quality management; To Consider: Creates an unrecorded & unfunded future liability; Goes not solve your transfer issues; Share future profits; Management takes no financial risk; Periodic valuations required; Management may not respond; Limits on deductibility to the company

I NTERNAL ● T RANSFERS 13 Charitable Remainder Trusts ●Donor gifts C corporation shares to a CRT (some or all of the stock – no prearranged sales) ●Gifting generates a charitable gift deduction ●The trust is a non-taxpaying entity (no capital gains on sale – math on Page 361 of Private Capital Markets) ●Donor lives off of distributions; can use a wealth replacement trust to take care of kids; upon death the principal reverts to one or more charities ●Value World: Fair market value

I NTERNAL ● T RANSFERS 14 CRT– Points to Consider The Good: Receive income tax deduction subject to limitations; Removes future appreciation from estate; Deduction based on current stock value; Can be less than 100% of your ownership To Consider: Only works for C corporations; Does not solve your transfer issues; Asset in the trust is not liquid; Dividends outside the trust are subject to double taxation; Charity may receive stock in your company

I NTERNAL ● T RANSFERS 15 Family Transfers ●There are a large number of ways to transfer the business to family members ●Acronym soup: SCINs, GRATs, FLPs, IDGTs, etc. ●Or you can just give stock away ●Realizing your dreams: perhaps one part family transfer; one part market transfer ●Value World: Fair market value

I NTERNAL ● T RANSFERS 16 Combination Strategies Using more than one approach to realize your motives!

I NTERNAL ● T RANSFERS 17 Combination Strategies Phantom Stock Options & Acronym soup CRT & MBO/MBI S Corp. Equity Recap & Dynasty -QSSTrust Executive Compensation & ESOP CRT & ESOP (remember, no prearranged sales; internal or external)

I NTERNAL ● T RANSFERS 18 Combination Strategy– Points to Consider The Good: Begins the Process of equity transfer; Does not preclude the business from external transfer; Provides asset protection; Can motivate management To Consider: All the “to consider” items previously discussed; Adds complexity to your life; Advisory team must understand your motives; Difficult to coordinate advisory team

I NTERNAL ● T RANSFERS 19 Owner Motives Matter Most ●Don’t let your advisors promote their motives or belief systems ●It’s your goals that need to be met!