Planning for a Great Finish: How Business Owners Finish Well

START ● PLAN ● ACT ● FINISH ● ENJOY

Plan to Finish Well

www.brownstonebusiness.com

Where are we Now?

41%

59%

Age of Owners

Under 50 Over 50


Where are we Now?

Yes - Ready21%

No - Not Ready79%

Succession Ready?


Where are we Now?

81%

19%

Retiring in 10 years

Yes - RetiringNo - Not Retiring


Wealth Accumulation

Wealth Diversification

Wealth / Business Transition

65

Wealth Protection

25 35 55 75

Changes in Wealth Considerations


Putting Wealth at Risk

Personal Wealth Driven by Busi-

ness

Do NOT Know Business Value

Business NOT Ready to Sell

76%

72%

84%

A Lifetime at Risk


Recipe for Disaster

Fewer companies are transitioning to the “next” or successor generation of managers and owners …

Aging ownership population …

Few owners have succession plans in place …

A larger percentage of businesses are currently not salable …

WHAT CAN GO WRONG???


Likely Outcomes

Owners lose the investment value of their business …

Families lose opportunities …

Employees lose jobs …

Domino effect


What are Your Options?

1. Internal Sale or Transfer

Family Members Partners Management Employees Combination of the Above



2. External Sale or Transfer

• Strategic Buyer Within the Industry

• Strategic Buyer in an Aligned Industry

• Financial Buyer



2. External Sale or Transfer

• RULE: 35 – 20 - 7

35% … are salable20% … listed will sell7% … of all businesses will sell



3. Keep it … growing trend

• Redefine your role in the business

• Enjoy a creative “partial” exit

• Benefit from insurance

• Stay mentally active



Three Possibilities – Business as an Investment

Active Partial Passive



4. Do NOTHING

“Doing nothing is the least logical, the most costly, the most destructive of all options – yet it is by far the most popular.”



The RESULTS of Doing Nothing

The COURTS … not the owner (or family) will decide the outcome

Uncle Sam will get his maximum share of taxes

Everyone else will pick up the remaining pieces


Why Owners Fail to Plan

Owners Managers Family



Owners

Managers

Family



They don’t want to retire They struggle to disconnect from daily

urgencies to do long-term planningThey are not aware of the benefits


Why is it so Hard?

There are Lots of Pieces in the Puzzle


A Comprehensive View

Primary Goals

Business Strategy Review

Management Succession Family Input

Business Finance

Estate Planning

Insurance Analysis

Investment Strategies

Shareholder Agreement

Risk Managemen

t

Corporate Structuring

Business Valuation

Retirement Planning

Compensation Planning

Business Transfer

Techniques


Where do we Begin?


Strategy First

Strategy without Tactics …… is the slowest route to victory.

Tactics without Strategy … … is the noise before defeat.


Strategy First

Strategy drives tactics

as the

Play drives

assignments


The Succession Strategy Process

Personal Goals

Stakeholder Goals

Business Plan

Wealth Plan

Legacy Planning

Family Dynamics

Estate & Tax

Planning

Execute & Revise


Personal Goals

Without goals, and plans to reach them, you are like a ship that has set sail with no destination … Dodson

The first step in creating your succession strategy is to define the desired end result that encompasses the owner’s personal goals and vision for the future of the business.


Personal Goals

“Blueprint” for success … vision … includes …

1. An image of the future state of your business years from now …

2. An image of what you hope to add to your life as a result of your succession plan …

3. The owner’s commitment to making this a reality …


Stakeholder Goals

Stakeholders = Individuals significantly impacted by the succession plan

Purpose of IncludingOwners can learn about their individual goals

and expectationsAll parties will feel a sense of ownership in

the planning process, greatly improving the likelihood of its success


Business Planning

Goal: Bring each of the business planning elements into a single coordinated plan.

Goals

BusinessFinancial

Risk

Value


Business Valuation

Why assess the value a business?

Estate and gift planning or compliance Establish a starting point Merger or acquisition Internal sale consideration ANSWERS THE QUESTION: HOW CLOSE AM

I?


Business Valuation

Fair Market Value

Willing buyer, willing seller, both having knowledge of all relevant facts and neither being under any compulsion to buy or sell. Revenue Ruling 59-60.Used For:

- Death - Litigation- Gift - Divorce- ESOP


Business Valuation

Investment Value The value of a business to a particular buyer based upon a return on investment analysis and the unique circumstances of the transaction.

Used For:- Purchase/sale transaction - Buy/sell agreement


Personal Wealth Planning

It’s not only about the business …

The business succession strategy is not ONLY about the business.

The process must also include:Preservation of individual wealthFinancial security for owners and familiesImpact on other key stakeholders


Personal Wealth Planning

Retirement Planning … for business owners1. Hard because …

Relying on cash flow or sales proceeds Impacted by management succession Requires tax planning Determined by valuation and corporate

finance


Legacy Planning

Three considerations …

Management

Succession• Choosing

a Successor

• Founder’s Role

Ownership Transfer

• Transfer Strategy

• Impact on Succession

Shareholder

Agreement• Triggerin

g Events• Price &

Terms• Funding


Legacy Planning

Management Succession … 1. Common Questions

Does the successor want the job? Is the successor competent and willing to learn? Is the parent willing to let go? Are there other siblings? What about non-family managers?

2. Grooming Successors Who is responsible? What is needed?

3. Founder’s Role


Legacy Planning

Shareholder Agreements … 1. What happens if the owner dies?

Does the family become a partner?

2. What happens with a disability?3. What if an owner “quits” the business?4. What is a fair buy-out price? 5. What are the terms of the buy-out?6. What is the funding for the buy-out?


Legacy Planning

Non-Partner Buy-Sell… 1. Protects the business asset/value

Identifying buyer and funding

2. Identify the buyer Key leader/manager

3. Create funding Usually insurance

4. Establish terms in agreement

Benefit: protected and preserved the value of the business for the owner’s family in the event of a disabling situation.


The Succession Process – A Shift

Personal Goals

Stakeholder Goals

Business Plan

Wealth Plan

Legacy Planning

Family Dynamics

Estate & Tax

Planning

Execute & Revise

Tactical

Practical

Personal


Estate & Tax Planning

One of the most significant issues in business succession is the myriad oftaxes that can erode the value of yourlife’s work.

Without going deeply into estate strategies, there are some that are fairly common



1. Keeping it in the family Selling to a family member

Must arrive at a realistic, legally defensible value of the business

Could potentially maximize taxation – purchase made with after tax dollars

At 34% tax bracket: business must make $1.52 to have $1 left to purchase assets or stock



1. Keeping it in the family Gifting Shares

$13,000 annual gifting to heir and spouse Lifetime gift limit of $1,000,000 for owner and spouse Reduce the value of the shares by re-capitalizing

business Reduced value for non-controlling shares

Irrevocable Trusts Shift assets of the business owner out of the estate

Supplemental Executive Retirement Plans (SERP) Provides income to the retired owner Is a liability to the company thereby reducing its value



1. Keeping it in the family Family Limited Partnerships

Useful for a long-term transfer of ownership Split the business into income – equity – control functions Sell or gift equity assets to successors Owner retains control Limited partnership units receive a greater discount Caution: do not be overly aggressive on the discount


Execute and Revise

Knowing the Plan Set a time frame Know your personal goals Know your stakeholder goals Align your business to support your goals

Work plan Metrics

Strengthen your business to increase income/value Work plan Metrics

Monitor and revise as needed


Execute and Revise

Knowing the Team

Business Owner

Succession Advisor

Valuation Financial Planner

Estate Benefits Specialist

Business Attorney

M&A Specialist

CPA Business Management

Insurance Investment


Next Steps

Contact Information

Paul [email protected]



Self-test: Succession Readiness

On a scale of 1 – 10 with …

“1” meaning, “Nothing more than a thought (if that)” and

“10” meaning, “It is written down and reviewed regularly”


1 = Nothing 10 = Finished & Reviewed

1. I have defined my personal goals and vision for the transfer of the ownership and management of my business.

2. My successor has been identified and is in place

3. I have considered the importance of family involvement in leadership and ownership of the business

4. I am currently using techniques that will minimize estate taxes

5. I have a “buy-sell” agreement in place


1 = Nothing 10 = Finished & Reviewed

6. I have enough liquidity to avoid a forced sale of my business7. I have a contingency plan to cover emergencies8. I have considered the impact my corporate structure will have on my succession goals9. I know what my cash flow needs will be when I exit my business10. I know the value of my business and how much I can expect to receive from it when I transfer it to someone else