1. Baker Tilly refers to Baker Tilly Virchow Krause, LLP, an independently owned and managed member of Baker Tilly International. © Baker Tilly Virchow Krause, LLP Effective succession planning: Dynamics, barriers and success strategies

2. Introductions 2 John Loew Senior Manager – Private Client Services Group john.loew@bakertilly.com 608 240 2398 John Loew is a senior manager in the Private Client Services group at Baker Tilly Virchow Krause LLP. John practiced law as an estate planning attorney for nearly 15 years in the Milwaukee area and, though he can no longer draft documents, he is able to work closely with clients and their advisors in devising, updating and implementing estate planning documents, with special emphasis on tax reduction. He specializes in estate, gift, income and charitable gift planning. John also has extensive experience in trust and estate administration, retirement distribution planning and business succession planning.

3. Succession planning The boss called one of his employees into the office. "David," he said, "you've been with the company for a year. You started off in the mailroom, one week later you were promoted to a sales position, and one month after that you were promoted to district manager of the sales department. Just four short months later, you were promoted to vice- chairman.“ "Now it's time for me to retire, and I want you to take over the company. What do you say to that?" "Thanks," said David. "Thanks?" the boss replied. "Is that all you can say?" "I suppose not," David said. "Thanks, Dad." 3

4. Major topics today 4 > Succession planning today > Insights into selling your business > Insights into retaining your business and passing it to the next generation

5. 5 Discussion of succession planning > I. Overview > II. Global business succession survey results > III. Preparing for transition of your business Today’s succession planning

6. 6 Succession planning – overview Succession Reset – Family Business Succession in the 21st Century > Final report issued July 2015 – four years of research > Survey conducted jointly by –Baker Tilly Pitcher Partners –Swinburne University > 2,650 business owners, 56 countries –36% in North America > Published the USA region report > For copy of Succession Reset, go to: http://www.bakertilly.com/insights/succession -reset-family-business-succession-in-the- 21st-century

7. Overall findings 7 > An unprecedented generational shift is occurring with Baby Boomer-owned family businesses > Family business is big business – making up two out of every three businesses in the nation and 70-90% of the annual GDP > Nearly 85% of all family owned businesses still have not completed their succession plan –51% have not even started the process > The traditional definitions of family business and succession are no longer relevant – they have been reset

8. Succession reset 8 Family business succession is certainly not new but it is receiving a lot more attention > Succession planning is being driven by the activity of the Baby Boomer generation as they face the inevitable challenge of transitioning their businesses to new managers and owners > In the next 10 years, trillions of dollars worth of businesses globally will have transitioned into the hands of new managers and owners > These transitions will present significant risks if not handled well but will also present opportunities > The key to navigating the risks and opportunities lies in understanding how succession in family and business has been reset and redefined > The time for family businesses to start planning for succession is right now; whether or not retirements are imminent

9. Succession reset (Contd.) 9 Succession in family business has been redefined in the 21st century Past era > The family business was the asset that passed from generation to generation > Succession to the next generation was expected –A mutual understanding and commitment > The possibility of children choosing other career paths outside the business was not promoted > Family obligation and duty came first, roles were clearly defined and known and traditional entitlements to wealth were clear > Individual freedoms and choice took second place > The business would remain in the family

10. Succession reset (Contd.) 10 Succession in family business has been redefined in the 21st century New era > Today, circumstances and expectations are quite different and this has created an uncertainty that is challenging families in business > Globalization, the internet and digitalization amplify the challenges > Children are encouraged to follow their own dreams > Children must now be qualified for any position they may occupy in the family business > Age and gender bias are still evident but weaker > Family harmony that existed around the business in the past must be negotiated without the business > Over 70% of family business owners now consider selling the business as an option

11. Succession reset (Contd.) 11 Succession in family business has been redefined in the 21st century New era (cont.) > Succession is now more about the generational transfer of the skills that sustain and create wealth and a passion for the business > A process of enabling the compounding of wealth from generation to generation while still ensuring individual growth, a sense of contribution and family unity > The skills required of the incumbent generation must include making their businesses “succession ready” > Succession ready = ready for transition by sale or passing it to the next generation

12. Global business succession survey results > The survey identified the key challenges family businesses face > Identifying the triggers, focusing on outcomes, and overcoming barriers are key challenges > The survey gathered data from businesses and families that had not yet started the succession process, those in the middle of the process and those that had completed the succession > Responses from founders, spouses, sons and daughters 12 Global business succession survey results

13. Challenges in succession planning Triggers – Identify the trigger that works for you is first critical step. > Professional advice recommending succession process commerce > Current incumbent generation is ready to transition > Incoming generation is interested and ready for transition 13 Survey Outcomes (Rank) 1.First 2.Second 3.Third Triggers – identifying the “trigger” that works for you is a critical first step > Professional advice recommending that the succession process commence > Current incumbent generation is ready to transition > Incoming generation is interested and ready for transition Survey Outcomes (Rank) > First > Second > Third

14. Challenges in succession planning 1.Continuity of the business 2.Family harmony 3.Ongoing jobs for employees 4.Keeping the business in the family 5.Leaving a legacy 6.Selling the business for the best price 14 >Interestingly, ‘selling the business for the best price’ diminished in importance by two thirds as succession progressed towards completion. >Principal outcomes of business owners who have completed their succession journey (ranked in order of importance by the business owners): Survey Outcomes (In Agreement) 1.86.6% 2.73.5% 3.72.7% 4.61.2% 5.49.0% 6.30.4% Summary of Outcomes Summary of outcomes > Principal outcomes of business owners who have completed their succession journey (ranked in order of importance by the business owners): > Interestingly, “selling the business for the best price” diminished in importance by two-thirds as succession progressed towards completion

15. Challenges in succession planning >The fair distribution of assets among family members >Capacity of the business to provide adequate returns >Capacity of the business to support retirement >General economic uncertainty >Capacity of the business to support the next generation 15 Barriers to deliver a successful succession process: Survey Outcomes (Rank) >First >Second >Third >Fourth >Fifth Barriers to deliver a successful succession process: > The fair distribution of assets among family members > Capacity of the business to provide adequate returns > Capacity of the business to support retirement > General economic uncertainty > Capacity of the business to support the next generation

16. 16 Eight principles of succession > Succession planning is the process of establishing goals and then mapping a path towards them while traversing the landscape and avoiding the various challenges that succession presents > The eight principles that provide guidance for the succession planning journey are as follows: 1.Succession is not retirement 2.Start with readiness 3.Set your goals before the journey 4.Harmony is a must 5.Price is not first 6.Plan early, start earlier 7.Equality is not equal 8.Ask before you get lost Global business succession survey results: Eight principles of succession

17. Global business succession survey results: Eight principles of succession (Contd.) 17 Principle 1: Succession is not retirement > Getting your head in right place > Incumbent team taking responsibility to make sure the next generation is capable, competent, experienced to take the business to the next level > Instead focus on growth and opportunities available to you today > Explore options for ensuring your business’ continuity and evolution Principle 2: Start with readiness > The succession process takes time, commitment, and motivation > It needs a clear and committed start Principle 3: Set your goals before the journey > Establish clear, measurable, and compelling goals to energize and engage those involved in the process > Before, during, and after the process, respondents’ goals changed (e.g., during the process, respondents’ main outcome they achieved was a goal—giving family members a better understanding of the demands of the business—that wasn’t even in the top five of outcomes they set out to achieve)

18. Global business succession survey results: Eight principles of succession (Contd.) 18 Principle 3: Set your goals before the journey

19. Global business succession survey results: Eight principles of succession (Contd.) 19 Principle 4: Harmony is a must > Creating, sustaining, and enhancing family harmony throughout the process is important for not only supporting and delivering your goals, but also for weakening and removing barriers that might exist in achieving those goals > Respondents said the importance of keeping family harmony never wavered throughout the planning process Principle 5: Price is not first – key considerations > ‘Continuity of the business’ and ‘ongoing jobs for employees’ are the biggest concerns during planning—no matter whether the owner is planning to sell, retain, or transfer the business > Before the process started, getting the highest price for the business was considered an important factor, but its importance lessened significantly throughout the process as emphasis shifted to other important succession factors

20. Global business succession survey results: Eight principles of succession (Contd.) 20 Principle 6: Plan early, start earlier > Because succession is about business continuity, ongoing jobs, and sustaining/building capital value, you cannot start planning for succession too early Principle 7: Equality is not equal – challenges > When family is involved, one of the key challenges is finding a balance of participation, ownership, and distribution of wealth > You must be fair, rather than “equal,” and base your decisions on historical and future contributions of family members > Achieving a fair distribution of assets among family members was one of the greatest challenges listed by respondents Principle 8: Ask before you get lost > The succession process can be complex > Work with professional advisors who can help you achieve the best plan for your family and business

21. Preparing for transition of your business > Transition could mean –Sale to third party –Gift or sale to family > There are a number of key elements that should be part of your succession plan whether you sell to third party or pass it to the next generation > This all starts with a plan 21

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23. © Baker Tilly Virchow Krause, LLP Baker Tilly refers to Baker Tilly Virchow Krause, LLP, an independently owned and managed member of Baker Tilly International. Why do I need succession planning? “Why do I need succession planning? I’m very alert, I’m very vibrant. I have no intention to retire.” Sheldon Adelson 23

24. Preparing for transition > Step 1 – Define your transition goals > Step 2 – Develop your transition strategy > Step 3 – Determine your company’s enterprise and net equity value range in the current environment > Step 4 – Prepare the business for transition > Step 5 – Make the appropriate changes > Step 6 – Monitor the results > Step 7 – Make adjustments > Step 8 – Execute your transition strategy 24 Step Transition Plan Steps to a solid transition plan > Step 1 Define your transition goals > Step 2 Develop your transition strategy > Step 3Determine your company’s enterprise and net equity value range in the current environment > Step 4 Prepare the business for transition > Step 5Make the appropriate changes > Step 6 Monitor the results > Step 7 Make adjustments > Step 8 Execute your transition strategy

25. Family keeps control of the business > Family maintains controlling ownership influence > Business stays intact – continuity and ongoing jobs > Ownership can be sold or transferred over time > Preserves potential for equity appreciation > However, wealth concentration risk remains 25 Step 1:Define your transition goals What are your transition goals/objectives/outcomes? Family sells control of the business > Capitalizes on strong current M&A market > Maximizes sale proceeds > Generates liquidity, while family may stay involved in the business > Significantly reduces wealth concentration risk allowing for diversification of assets > Allows family to concentrate on preserving diversified wealth

26. Step 2:Develop a transition strategy 26 > Assess whether you have an incoming family generation that is willing and able to run the business > Family: –Are they prepared to step into your shoes? –Is there an obvious family successor? –Are their goals consistent with your goals? > Management: –Is the management team complete? –Is there someone on the existing team that can or is willing to lead the company?

27. 27 Develop a transition strategy Capital / liquidity strategies Cash Distributions > Pay off debt > Distribute excess cash Leveraged Dividend Recapitalization > Use senior and/or mezzanine debt to finance a dividend to current owners (non-dilutive) > Gifting, transferring, or selling shares in the business to family members or management (transition) > Use senior debt, mezzanine debt or private equity to create significant liquidity for transfer of control (sale transaction) while maintaining equity upside for family and management Strategic Buyer > Typically the highest valuation potential for the largest amount of liquidity today Internal Transfer (MBO, ESOP) or External Transfer (LBO) SellKeep Family keeps control of the business > Family maintains controlling ownership influence > Business stays intact – continuity and ongoing jobs > Ownership can be sold or transferred over time > Preserves potential for equity appreciation > However, wealth concentration risk remains.

28. Step 3: Determine your company’s value range 28 It is critical for potential sellers to have an understanding of what their company may be worth - taking into consideration: > Company size (revenues) and company specific risks > Operating performance –EBITDA / Adjusted EBITDA –EBITDA Margins –Potential add-backs (EBITDA adjustments) or savings under new ownership > Quality and depth of the management team > Quality of customer and vendor base (the less concentration the better) > Growth opportunities – organic / acquisition > Net working capital requirements > Capital expenditure requirements > Industry risks and competitive environment > General economic conditions > Credit markets > M&A activity

29. Determine your company’s value range (Contd.) 29 Every transaction is based on Enterprise Value (“EV”) > An Enterprise Value range can be determined by applying the following analyses: –Comparable public companies –Comparable transactions –Discounted cash-flow (“DCF”) analysis –Estimated leveraged buyout analysis > To conduct the analysis an advisor typically requires three years of historic financial statements and five years of projected financial statements > EV multiples are the EV divided by the reported earnings (EBITDA)

30. Sale of the company enterprise value to estimated after-tax equity proceeds > The following estimates after-tax net proceeds based on an estimated Enterprise Value of $20 million: 30

31. The third-party’s perspective 31 Operations > Collect operating metrics – weekly, monthly, annually > Understand how the company compares to peers – industry data > Know what data might be requested (varies by industry) –Sales ($ and units, by SKU, by customer, by end markets) –Cost of goods ($ and units, by SKU, by type of cost) »Raw materials »Outsourced services »Labor »Overhead »Scrap or waste rates –Capacity utilization –Production rates and through put –Quality metrics –Supplier/vendor concentrations –Condition of equipment

32. Step 4: Prepare the business for transition 32 > Determine the time line or transition target date > Select your team – will depend upon the nature of the transition –Management –Legal –Tax –Accounting/systems –Investment banker and appraisers

33. Prepare the business for transition 33 > Develop a strategic plan for next 5-10 year periods contemplating change of management and change of ownership > Recapitalize your business into controlling and non- controlling ownership units > Identify and define roles for family in business > Develop a plan to shift ownership by sale or gift > Coordinate business ownership shifts with estate plan

34. Step 5: Make the appropriate changes 34 > Execute on strategic plan –Putting family members in the right positions –Fill other key positions with key employees –Educate and train next generation of managers and owners > Execute on change of management plan > Execute on change of ownership > Estate planning changes –Shifting non-business assets to family members not in business –Coordinate equalization fairness in estate dispositive documents (will and trust)

35. Steps in the aftermath of the transition plan > Step 6: Monitor Results > Step 7: Make Adjustments > Step 8: Execute Your Transition Strategy 35

36. 36 Insights into selling your business > Preparing to go to market > Pitch and engagement letter > Information memorandum contents > Executing the deal > Conclusion

37. 37 I. Preparing to go to market

38. Preparing to go to market In order to maximize transaction value, sellers should consider a thorough pre-marketing analysis to gain a sound understanding of potential transaction objectives, value range and deal structure(s) > Gather financial information: A rigorous pre-market analysis could be conducted to assist the seller in developing normalized historic and projected financial data that supports a strong, achievable sale story prior to going to market. > Estimate value range: The financial information developed through the pre-sale preparation process will assist in developing a focused preliminary enterprise and pre-tax equity valuation range. > Assess transaction structure and potential buyers: The financial information developed through the preparation process will assist the seller in developing a preliminary transaction structure. Dialogue with the seller and thorough research of the universe of potential strategic and financial buyers will result in a robust buyer list. A rigorous preparation phase can help the seller to maximize value Preparing for the sale 38

39. Are you ready for sale? > Why do you want to sell? > What is your commitment to the sale process? Are you emotionally ready to sell? > Are there more effective exit strategies (Gifting, MBO, ESOP, IPO)? > How strong is the company’s historic and projected financial performance/ operating metrics / market position/ customer base/ management (including family members) 39

40. Are you ready for sale? (Contd.) > Will a sale achieve your financial and non-financial goals and objectives? > What is the estimated enterprise value and net pre-tax equity value of the company? > What risks (product/legal) are specific to the company that may impact value? > What is the general condition of the company (assets, liabilities, financial and operational records)? > How much time do you have to prepare the company? > What is your target exit date? > Do you want to exit completely or participate in the near future of the company (as management / equity / financing source)? 40

41. Preparing for sale Get organized > Books and records > Completed historic compilation/review/audit > EBITDA adjustments > Projections and related assumptions Reverse due diligence > Quality of earnings –Revenue recognition –Customer/product/service/geographical/ market/supplier concentrations –Verification of EBITDA adjustments –Gross/EBIT/EBITDA/Adjusted EBITDA margins –Trend analysis –Operating risk analysis –EBITDA vs. free cash flow > Quality of assets –Working capital –Unrecorded/under-recorded liabilities –Latest appraisals of property, plant and equipment –Appearance 41

42. Preparing for sale (Contd.) Quality of information > IT systems capabilities and capacity > Effective and accurate Tax > Compliance/exposure > Opportunities Other > Backlog > Voice of the customer > Operations and supply chain > Related-party transactions Advisors > Investment banker > Legal > Accounting and tax 42

43. What is the company worth? It is critical for sellers to have a firm grasp of what their company is worth — taking into consideration the current state of the company, the industry in which it operates, capital markets and M&A transaction activity and general economic conditions. 43

44. What is the company worth? > Three to five years of historic financials > Five year projections with related assumptions > The sustainable rate of growth in cash flows > An enterprise value range can be determined by applying the following analyses: –Comparable public companies –Comparable transactions –Discounted cash flow analysis –Estimated leveraged buy-out analysis > EV multiples are the EV divided by the reported earnings (EBITDA) > Assessing risk: –General economic risk –Industry specific risks –Company risks 44

45. Deal structure objectives > Seller’s objectives –Maximize net after tax cash proceeds –Establish transferable liquid wealth > Buyer has competing expectations –Minimize net present value paid for business –Protect against unforeseen events > Seller will interact with buyer on structure –Due diligence process –Purchase agreement representations »Escrow »Tax indemnifications »Purchase price allocation »Control over future IRS, state and local, or international audits –Tax structure –Timing of proceeds 45

46. Deal structure: key terms While enterprise value is always important to a purchase agreement, there are several other key terms to consider in a transaction: > Transaction structure –Asset sale –Stock sale –338(h)(10) election: Stock purchase that achieves the benefits of an asset purchase –Desire for “Rollover” Equity (“second bite at the apple”) > Seller financing and earn-outs –Often used to “bridge the valuation gap” > Escrows –Amount and release timing > Representations and warranties –R&W insurance –Caps and baskets > Working capital target > Consulting and management retention contracts > Non-compete agreements 46

47. 47 II. Pitch and engagement letter process

48. Typical pitch book contents > Overview of the potential transaction > Preliminary valuation considerations /analysis /range –Comparable public companies, comparable transactions, discounted cash flow and leveraged buyout analysis –Value drivers/issues –Gross and net proceeds > Potential buyers –Strategic and financial (private equity), domestic and foreign –Investment banker/financial advisor relationships > Investment bank/financial advisor overview –Transaction track record –Team > Transaction process > Proposed fees 48

49. Engagement letter process A typical engagement letter includes the following terms and conditions > Scope of services > Fees and expenses > Term and termination > Indemnification > Representations by the company regarding the accuracy and completeness of the contents included in the offering memorandum and other information > Decision making authority > Legal jurisdiction 49

50. 50 III. Information memorandum table of contents

51. Sample information memorandum table of contents > Executive summary –General business description –Brief history/background of business –Summary of key investment highlights –Summary financial highlights –Transaction overview > Investment highlights (examples) –Strong historical and projected financial performance –Quality and depth of customer base –New business pipeline –Advanced operating capabilities –Leading niche market position with customizable product/service offerings –Experienced management team and skilled employee base 51

52. Sample information memorandum table of contents (Contd.) > Strategy –Company goals and objectives –Management's growth strategy –Value drivers > Products and services –Description of product/service offerings –Description of any processes, technologies, etc. –Awards, distinctions, etc. (if any) –General industry overview (history, drivers, recent or upcoming changes) > Sales and marketing –General description of sales process –Discussion of marketing efforts, sales tools, trade shows, etc. 52

53. Sample information memorandum table of contents (Contd.) > Customers –Top customers, tenure of relationships –New business initiatives –Customer service > Operations –Nature and description of key operations/facilities –Processes/capabilities/capacity –Description/discussion of product/service offerings –Facility descriptions/locations/pictures etc. –Environmental/health/safety/insurance/legal considerations 53

54. Sample information memorandum table of contents (Contd.) > Competition –Discussion and description of competitive landscape –Detail and discussion of competitive advantages > Management and employees –Organizational chart –Key management personnel with brief bios –Comments on employee relations –Employee roster (by location, function, hourly/salaried), average tenure, etc. –Brief description of employee benefits 54

55. Sample information memorandum table of contents (Contd.) > Financial information –Historical financial data – 3 years »Summary income statement, balance sheet and cash flow information »EBITDA reconciliation (EBITDA adjustments with descriptions, if applicable) »Sales and gross margin by major service line »Summary of historical capital expenditures (growth and maintenance) »Brief management discussion and analysis > Projected financials – 5 years –Summary income statement/balance sheet/cash flow information –Projection assumptions/drivers and rationale –Capital requirements 55

56. Polling question Which two sections of the information memorandum are the most important? a) The investment highlights and financial information sections b) The customers and operations sections c) The products/services and management/employees sections d) All of the above 56

57. 57 IV. Executing the Deal

58. The transaction process (Contd.) Strategy Prepare CIM / finalize buyers list Market the company Obtain initial offers Buyer due diligence Selection of final offers Negotiate the transaction Months 1 and 2 Month 3Months 4 and 5Month 6 + Sale process typically takes 6-9 months to complete > Define seller’s objectives > Formulate marketing strategy > Identify preliminary list of potential buyers > Assess preliminary valuation range > Prepare Confidential (“CIM”) Information Memorandum / Teaser > Finalize buyers list and contact strategy > Contact prospective buyers > Distribute Teaser > Execute Confidentiality Agreements > Distribute Confidential Information Memoranda > Draft Management Presentation > Data room preparation > Obtain preliminary indications of interest > Evaluate offers in context of objectives > Select qualified buyers > Management presentations > Arrange due diligence / data room visits > Request final proposals > Select final buyer(s) –Price –Documentation –Financing –Closing ability > Negotiate with top buyer(s) > Work through Hart-Scott- Rodino and other regulatory filings with counsel > Execute definitive Agreement > Closing 58

59. Roles in the sale process ˃ Provide the Seller with guidance on realistic objectives, outcomes and potential strategies for the sale process. ˃ Analyze the operations, employees and financials of the company to best position the company in the market. ˃ Develop the marketing materials (including the teaser and offering memorandum) from information provided by the Seller. Work with the Seller to determine the best presentation for the Company. ˃ Prepare a population of potential strategic and financial buyers who may have an interest in the Company. Discuss the merits of potential buyers with the Seller. ˃ Based on the population of approved buyers, contact buyers, send out the teaser / non-disclosure agreement / information memorandum. Solicit indications of interest from potential buyers based on these discussions and work with the Seller to select the buyers to be invited to a management presentation. ˃ Develop and facilitate the management presentations with the Seller. ˃ Provide guidance to the Seller on key terms included in the term sheet / letter of intent and negotiate with select buyers. ˃ Assist the Seller in preparing for the buyer’s due diligence process, facilitating the flow of information. ˃ Work with the Seller and the Seller’s legal team to negotiate the terms of the purchase agreement. Advisor’s role ˃ Set defined objectives. Determine your individual goals as well as those for the future of your company / employees. ˃ Provide your advisor with complete, accurate and detailed information on the history of your company and its current and projected performance. ˃ Gather and provide the information necessary to prepare the offering memorandum and work with your advisor to organize and present the information in a way that will make potential buyers comfortable with your company’s past and projected future performance. ˃ Review and approve a population of potential buyers developed by / with your advisor. ˃ Continue to manage your company without making material changes to the way it has operated historically. ˃ Lead management presentations to discuss your company with select buyers who have provided an acceptable indication of interest. ˃ Based on the final offers received, select a buyer and work with your financial and legal advisors to finalize a term sheet / letter or intent. ˃ Cooperate with the selected buyer as they perform due diligence, allowing them access to you, your books and records, key employees and customers as necessary to gain comfort with your company. ˃ Make the final decision on the terms and conditions of the purchase agreement. Seller’s role 59

60. Key considerations Key considerations when engaging an advisor include: > Trust: The sales process can be an intense time for the Seller; selecting a trusted advisor helps to significantly reduce the stress of the process. > Experience: Each sale process is unique and involves many moving parts. Selecting a trusted advisor that has extensive experience in successfully closing deals is important to identify / address issues and ensure a smooth transaction process with limited / no surprises. > Access to potential buyers: Select an advisor that has access to relevant strategic and private equity buyers domestically and globally (if applicable). > Resources and credentials: Ensure that your advisor’s firm is registered with the SEC and a member of FINRA. This provides a level of quality control over investment bankers processing transactions and dealing with clients. > Fees and expenses: An example of a typical fee structure (not necessarily for your transaction) is as follows: –Retainer(s) –Success fee: XX% up to Enterprise Value of $XX million (typically the midpoint of advisor’s estimated Enterprise Value); plus XX% of the Enterprise Value over $XX million. This approach aligns the Seller’s and financial advisor’s objectives to maximize Enterprise Value. –Minimum Success Fee: Typical for transactions with EBITDA < $5 million –Expenses: Out-of-pocket expenses, including travel, data room costs and other expenses are typically reimbursed by the Seller. 60

61. Estate planning transfers in advance of a sale Lifetime estate transfers > Estate planning is more than making sure your assets go where you want them to at your death > Lifetime transfers can reduce your taxable estate –Using valuation adjustments when transferring fractional interests in business entities, –Shifting growth out of your estate, –Shifting ownership to vehicles that hold and protect the assets for your greater family while keeping control and –Still provides flexibility to be part of a sale of the entire business to that third party > By shifting ownership out of your estate as part of a longer range plan, the growth will be captured for your family outside of your estate 61

62. 62 Insights into keeping your business – transferring it to the next generation > The family business presents unique challenges and barriers > Setting your goals and outcomes > Assess your current situation – business/ownership/governance/family > Transition strategy to achieve goals – plans for change

63. 63 I. The family business presents unique challenges and barriers

64. Family business unique challenges Unique challenges of family businesses > Succession is very complex because you need to address the legal, tax and financial issues AND also the psychological and emotional issues > Planning includes addressing the three key systems, the operation of the business, the ownership and governance of the business and the family – “3 circle model” > Your team of advisors needs to represent multiple disciplines including behavioral and management services 64

65. Family – three circle model 65 Source: Tagiuri & Davis 1982 The overlap of the circles is where barriers and challenges arise Family business consultants work in the overlapped areas Three circle model OwnershipFamily Business

66. Polling question What is the most significant challenge your family business faces? a)Viability and growth of business b)Lack of family members to take over c)Ability of business to support multiple generations d)Other 66

67. 67 II.Setting your goals and optimal outcomes

68. Goals and optimal outcomes > The first step in any planning process is establishing what your goals and optimal outcomes are: –Every business and family is unique so optimal outcomes will be different –No one size fits all plan > However, in many instances, attention shifts quickly to taxation, accounting, financial and legal issues, with very little concentration on the reason you commenced the process, the emotions of the process and the impact on family > Clearly articulate what is truly important to you as you delineate the goals and optimal outcomes > Key questions to consider when setting goals 68

69. Key questions 69 Q1.Why are you thinking about succession planning? Source: Baker Tilly International: Succession Planning Guide ˃ I am looking to develop a long- term plan ˃ The time is right ˃ I would like to be able to go to fishing when I want ˃ My business needs new blood and ideas ˃ The kids want more control ˃ It’s time for me to think of retiring ˃ I am not well ˃ I’m too old for this game ˃ I want to cash out of the business ˃ I want to give some of my senior people a share of the business ˃ I wanted to spend time with my grandchildren ˃ I want to travel overseas and need someone to mind the business ˃ My spouse told me I should ˃ Other reasons…

70. Key questions 70 Q2. What are your initial expectations? Source: Baker Tilly International: Succession Planning Guide ˃ Ensure the business continues when I’m gone ˃ Ensure jobs stay in the community ˃ Keep family harmony – fair split of assets ˃ Pass the business onto my children ˃ Leave a legacy ˃ Sell out and get the best possible price ˃ Other expectations…

71. Key questions 71 Q3. Where would you want to be in five years? Source: Baker Tilly International: Succession Planning Guide ˃ Retire in five years with $_________ million in the bank ˃ Earn an annual income of $_______ ˃ Have no day-to-day involvement in the business ˃ Other goals…

72. Key questions 72 Q4. What legacy do you want to have? Source: Baker Tilly International: Succession Planning Guide “A legacy is created only when a person puts his organization into the position to do great things without him.” John C. Maxwell ˃ What is it you are known for now? ˃ What is it you wish to be remembered for? ˃ Are there some other activities you would like to be involved in? ˃ Is there a cause or charity you would like to support? ˃ How would you like your business colleagues to speak about you?

73. Setting your goals > Take a moment and reflect carefully on what you have written > Now lets pull all this together and set down your goals, compelling reasons for achieving these goals and the results you seek > Here are examples of what a list of goals could include: 73 GoalCompelling ReasonResult Sought Pass the business over to the kids Family succession is critical for the next generation Smooth handover within two years and profit continuing to grow Retire with $5M cash and annual cash flow of $150K I will be financially independent $5M within three years of transfer Increase business revenue 10% for next 5 years Strengthen viability and competitiveness Business can support multiple generation and buyout of business Source: Baker Tilly International: Succession Planning Guide

74. Family goals > If your succession process has identified moving the business to the next generation as a primary goal, then you must establish a vision for your family and gain their individual commitment to the goals, reasons and results sought > The most important and complex matters you may very well need to deal with concern family and the individuals in it > The long-term preservation of the wealth created by the business, and unity of the family will be directly proportional to the effort and time you apply 74

75. Family goals > In your heart, what is your vision for your family? –What values should the family and its members hold true to? –What contribution would you like the family and its members to make to society? –What is the role or purpose of wealth in the family? –What lifestyle is sought for present and future generations? –What is the glue that keeps the family together? How will this unity be maintained? –How should the wealth be managed, controlled and divided? –What is the process for identifying and resolving disputes within the family? 75 Source: Baker Tilly International: Succession Planning Guide

76. Family goals Providing a compelling rationale for the family to remain united across generations is one of the core outcomes that you may be seeking to achieve from his process This rationale will need to incorporate: > A strong sense of shared or common purpose and community within your family > An articulated and clear vision for the family that is premised on the worth of the individual > A set of values and their application that will guide family and individual conduct in future years > An organizational structure that allows open communication and information flow with the family > A family charter that contains clear terms of agreement between family members > A foundation of equality for all (while allowing for individualism), with the ability for anyone to exit under the clear terms > A mechanism for resolving disputes 76 Source: Baker Tilly International: Succession Planning Guide

77. 77 III.Assess your current situation

78. Current business assessment > In all cases, the business must succeed for transition to be successful –Can the business support the exiting and succeeding generations? –What is its position in industry? Competitiveness? –Are there underperforming business units? Growing units? –Is there a need to expand into new products and services? –Should you discontinue unprofitable lines/divisions? –What is the customer base – diversity and/or concentration? –Do you have senior management team groomed to take over? –Are family members and and/or key employees on that senior management team? 78 Source: Baker Tilly International: Succession Planning Guide

79. Current business assessment > Strategic Business Plan –Where is the business going and how it is going to get there –Resources required and type of people needed to make it happen –Key guide to the value of your business and what succession actions should be undertaken > Business Value Assessment –Determine your company’s enterprise and net equity value range in the current environment –Identify the key value drives and issues of your business –Much of a business’ value today lies in intangible assets (“goodwill”) and various rights, licenses and intellectual property –To build value, not only do you strengthen your profit, but you also demonstrate the business will continue in future –Reinforce the intangibles that support and drive profit 79 Source: Baker Tilly International: Succession Planning Guide

80. Ownership/governance/management > Types of ownership –Corporation (C Corp or S Corp) – voting and non-voting stock –Partnership – General and limited partners –Limited liability company (LLC) – Voting and non-voting member units > Current owners –Family »Generation to generation »Working in business and/or not in business –Key employees/partners > Issues in family business –1 st generation (sole control) vs 2 nd and 3 rd generation (team) –Lack of information/decision making –Ownership with and/or without control –Fair vs equal 80

81. Ownership/governance/management > Shareholder/Partnership agreements, LLC operating agreements – “Buy/Sell” agreements –Valuation –Terms of transfer –Transfer events/triggers –Limitations –Cross purchase versus redemption –Mechanics to get non-family out of business 81

82. Ownership/governance/management > Current management - family –Children in business? What roles? –In management positions? –Capable of management and leadership? –Training/mentoring programs for them? –Spouse(s) in business – role(s)? > Current management – key employees (non-family) –Key roles? –Mentoring young family members? –Could business operate with key employees and no family? > Family business issue –Change in model; entrepreneurial to team based –Identification and development of key management talent 82

83. Family > Family in the business? Out of business? > Spouse(s) in the business? > Family charter, or vision statement > Estate plan in place for –Lifetime transfers of assets –Ultimate transfers at death –Division and equalization provisions > Family business issues –Owner/CEO avoidance/denial/resistance –Sustained conflict situations; conflict follows circular, repetitive pattern of interaction which needs to change 83

84. 84 IV.Transition strategy to achieve goals – plans for change

85. Business transition strategies > Develop and implement strategic plan –Identify changes and the necessary steps so the business can accomplish goals –Follow the plan – it is the tool you will use > Make your business succession ready –Not necessarily to maximize value –Ensure future viability of business for next generation 85

86. Management and leadership strategies > Identify the key roles in business that are critical to its success when you are not involved > Plan to fill those roles with family and/or key employees –Entrepreneurial to team approach –Are family members ready, willing and able? –Are there key employees to fill in gaps? > How to gain knowledge and experience –Work for someone else and return to family business –MBA program requirements –Development and training program within company 86

87. Management and leadership strategies > Ability to manage and lead by family and key employee needs to be demonstrated for succession to work – develop and implement process to measure > Don’t put family members in roles they can’t perform just because they are family; they must earn the role > Pay for performance and roles that family members occupy > Some roles are more key than others and carry more natural operational control; aside from voting control, decide what roles control the day-to-day operations > Management and leadership demonstrated before ownership transition occurs 87

88. Ownership strategies > Ownership representing value and cash flow (non-voting) often transferred before controlling ownership (voting) –Allows the next generation to enjoy benefits of ownership without older generation giving up control until management and leadership demonstrated –Recognizes contribution of younger family to business –Might also accomplish estate planning goals if managing older generation’s taxable estate > Voting control transferred when older generation ready –Consider who should receive real control (if multiple family members in business) by receiving more than 50% of controlling ownership > Family –Outright by individuals –In trust for benefit of family > Valuation adjustments with intra-family transfers 88

89. Ownership strategies > Shareholder and/or partnership and LLC Agreements need to be redrafted to address increased ownership > Lifetime transfer plans and estate disposition plans (will, revocable trust) need to be developed and coordinated to address: –Fair versus equal division of assets –If equal division is necessary, the shareholder agreements need to address: »Children in business buying out siblings not in business or »Company redeeming those not in business »The operating company ownership versus the real estate ownership »How do you reward those in business for building value for those not in business? –If business assets are to go only to children in business »How do you divide remaining other assets among children not in business? »How can you create additional wealth and liquidity to fund other shares? 89

90. Ownership strategies > Need to consider the financial independence/security of the exiting older generation –If value of business needs to fund retirement »Sale of ownership to next generation »Deferred compensation plan –If value not needed »Lifetime gifts and sales (to have some “skin in the game”) »If gifting to children in business, may need to gift other assets to children not in business 90

91. Family strategies > Implement family vision statement – family charter –Acting as a forum to discuss and resolve business/family issues –Maintaining and enhancing the family charter –Educating family members for induction into the family business –Creating and implementing the family vision –Providing accountability on investments, businesses and sponsored activities –Acting as a voice for individual family members who may or may not be shareholders > Engage family business consultant as necessary 91 Source: Baker Tilly International: Succession Planning Guide

92. Sample case study of Family Transfer Bill (age 60) and Mary (age 59) >In 1992, they started a manufacturing company >The company operates as an S Corporation >There were 100 common voting shares issued and outstanding >Bill and Mary each own 50% >The two real estate locations/plants/facilities are owned in an LLC – Owned by Bill and Mary – 100 voting member units 92

93. Bill and Mary have three children > Matt (age 35), married for 10 years, with two children (ages 8 and 5) –At age 15, started working in business –Grew up in manufacturing operations and sales operations –Is taking more responsibilities and making more decisions each year –After college worked for large manufacturing company for five years before rejoining family business at age 25 > Jane (age 33), married for six years, with one child (age 5) –Jane handles marketing, HR, and company administration for both companies –Has been in business for seven years –Worked for accounting firm before joining family business – four years –Jane handles Real Estate LLC Sample case study (Cont’d.) 93

94. Bill and Mary have three children > Steven (age 28), never been married, has two children (two different mothers; ages 8 and 5) –Works as waiter in local restaurant 94 Sample case study (Cont’d.)

95. >To date – legal, tax and financial steps taken >We have recapitalized the operating company with voting and non-voting stock >We amended the LLC to be manager managed >A trust was created for each child and their families – Matt and Jane’s will terminate and distribute to them when they are 45; Steven’s trust stays in effect for his lifetime and then terminates to Matt and Jane >50% of company non-voting stock was gifted/transferred-25% into Matt’s and 25% into Jane’s trust >50% of the LLC units were gift transferred into Steven’s trust – prior to that 30 year lease created between the LLC and the company >Bill and Mary’s estate disposition plan was modified to equalize the children at the second death – with insurance proceeds in life insurance trust >Shareholder and LLC agreements modified for restrictions for discounts and options for putting and calling ownership >Family business consultant worked through planning and has ongoing annual consults with family Sample case study (Cont’d.) 95

96. Alternatives to selling to third party or transferring business to family 96 > Close up shop; sell what remains > Do nothing > Divide business and spinoff to different recipients > Gift to management/select employees > Sell to management/select employees (difficulty of obtaining financing) > Management Buyout (MBO) > Employee Stock Ownership Plan > IPO > Pull out cash in other ways

97. 97 Conclusion

98. Disclosure The content in this presentation is a resource for Baker Tilly Virchow Krause LLP clients and prospective clients. Nothing contained in this presentation shall be construed as legal advice, opinion, or as an offer to buy or sell any property or services. In conformity with U.S. Treasury Department Circular 230, tax advice contained in this communication and any attachments is not intended to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code, nor may any such tax advice be used to promote, market or represent to any person any transaction or matter that is the subject of this communication and any attachments. Securities when offered, and transaction advisory services are offered through Baker Tilly Capital, LLC, Member FINRA and SIPC; Office of Supervisory Jurisdiction located at Ten Terrace Court, Madison, WI53718; phone 800 362 7301. Baker Tilly Capital, LLC is a wholly-owned subsidiary of Baker Tilly Virchow Krause, LLP, an accounting firm. Baker Tilly Virchow Krause, LLP is an independently owned and managed member of Baker Tilly International. 98

99. The content in this presentation is a resource for Baker Tilly Virchow Krause, LLP clients and prospective clients. Nothing contained in this presentation shall be construed as legal advice, opinion, or as an offer to buy or sell any property or services. In conformity with U.S. Treasury Department Circular 230, tax advice contained in this communication and any attachments is not intended to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code, nor may any such tax advice be used to promote, market or recommend to any person any transaction or matter that is the subject of this communication and any attachments. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments. Securities, when offered, and transaction advisory services are offered through Baker Tilly Capital, LLC, Member FINRA and SIPC; Office of Supervisory Jurisdiction located at Ten Terrace Court, Madison, WI 53718; phone 800 362 7301. Baker Tilly Capital, LLC is a wholly-owned subsidiary of Baker Tilly Virchow Krause, LLP, an accounting firm. Baker Tilly Virchow Krause, LLP is an independently owned and managed Member of Baker Tilly International. Disclosure 99