- 1. EXIT STRATEGY PLANNINGAchieving optimum value for your
businessPresented by:Denis M. BrownAbraxas Business Services5279
Glenridge Drive NEAtlanta, GA 30342(404)
[email protected]/19/13 ABRAXAS BUSINESS SERVICES
1Copyright 2012
2. EXIT STRATEGY PLANNINGYouve gotta to be careful if you dont
know where you are going because you might not get there Yogi
Berra.3/19/13ABRAXAS BUSINESS SERVICES2Copyright 2012 3. EXIT
STRATEGY PLANNING3/19/13ABRAXAS BUSINESS SERVICES 3Copyright 2012
4. EXIT STRATEGY PLANNING Exit Strategy PlanningBusiness
PlanningEstate PlanningExit Strategy Planning coordinates and
integratesBusiness Planning and Estate Planning based on
theBusiness Owners objectives3/19/13ABRAXAS BUSINESS SERVICES
4Copyright 2012 5. MARKET NEEDBased on a 2005 survey by
PriceWaterhouseCoopers: More than 4.5 million business owners are
50 years old or older. 67% of business owners of firms with
revenues from $5 million to $150million plan to leave the business
within the 10 years. More than 75% of the owners have not done much
planning for whatwill probably be the single most significant
financial event of their lives.M&A Marketplace: Success rate is
1 in 4 actually sells(1) Success rate for businesses with sales of
$10 million 1 in 3(1) Success rate for businesses with sales above
$10 million 50-50(1) (1) 2005 Business Reference Guide by Tom
West3/19/13ABRAXAS BUSINESS SERVICES5Copyright 2012 6. EXIT
ALTERNATIVESSell to a Strategic Buyer 100% liquidity.Sell to a
Financial Buyer up to 100% liquidity.Sell to Management/Family up
to 100% liquidity.Recap harvest a majority of your net worth and
retain minority ownershipfor a second bite of the apple but still
maintain operational control of thebusiness.ESOP up to 100%
liquidity selling the business to the employees.IPO initial public
offering.Liquidate.Is your company positioned to consider multiple
exit alternatives or are youralternatives limited?3/19/13 ABRAXAS
BUSINESS SERVICES6Copyright 2012 7. ISSUES LIMITING EXIT
ALTERNATIVES AND VALUEIs there an heir apparent or a management
team capable of taking thebusiness to the next level or run the
business in the owners absence?Do you have a relatively consistent
cash flow performance trend?Does your largest customer account for
less than 20% of sales?Do you have multiple suppliers for product
or raw materials?Do you have systems and processes to properly
manage the business in thefuture and provide the level of service
expected from your customer base?Does the business have
opportunities for growth through geographicexpansion, product line
extensions or new channels of distribution?Do you have excess
capacity to support future growth?A NO to any of these questions
may limit your alternatives and depress thevalue of your business.
Proper Exit Strategy Planning addressing these andother issues will
produce the desired results positioning the business as
anattractive investment from multiple sources.3/19/13ABRAXAS
BUSINESS SERVICES7Copyright 2012 8. INGREDIENTS OF A SUCCESSFUL
EXIT A written Exit Strategy Plan based on an owners objectives.
Designed and implemented by an experienced team of advisors. Cash
flow, maximizing value Management Team capable of running the
business. Time.3/19/13ABRAXAS BUSINESS SERVICES8Copyright 2012 9.
EXIT PLAN COMPONENTS3/19/13ABRAXAS BUSINESS SERVICES 9Copyright
2012 10. EXIT PLAN COMPONENTS Quantify BusinessDefine Owner and
Personal ObjectivesResources MaximizeOwnershipPersonal and
OwnershipBusinessTransfer toWealth Protect Transfer
toContinuityThirdand Estate BusinessInsiders
PlanningPartiesPlanning Value COMPREHENSIVE EXIT PLAN3/19/13ABRAXAS
BUSINESS SERVICES10Copyright 2012 11. SEVEN STEP PROCESSStep 1
Identify Exit ObjectivesStep 2 Quantify Business and Personal
Financial ResourcesStep 3 Maximizing and Protecting Business
ValueStep 4 Ownership Transfer - Selling to Third PartiesStep 5
Ownership Transfer - Selling to InsidersStep 6 Business
ContinuityStep 7 Personal Wealth and Estate Planning3/19/13 ABRAXAS
BUSINESS SERVICES 11Copyright 2012 12. 1. IDENTIFY EXIT
OBJECTIVESThe process begins with answering three questions:How
much longer does an owner want to work in the business
beforeretiring or moving on?What annual after-tax income does the
owner want during retirement?To whom does the owner want to sell
the business?Benefits to the Owner:Clarifies priorities.Facilitates
progress by identifying a desired outcome.Controls and defines the
Exit Strategy Planning process.3/19/13 ABRAXAS BUSINESS SERVICES
12Copyright 2012 13. 1. IDENTIFY EXIT OBJECTIVESAdditional
Objectives:Shift wealth to children.Provide charitable gifts or
transfers.Reward employees.Receive full value for the business.Take
business to the next level.3/19/13 ABRAXAS BUSINESS SERVICES
13Copyright 2012 14. 1. IDENTIFY EXIT OBJECTIVESAdvisory Team:Who
is the advisory team? Attorney Estate, Tax, Corporate Wealth
Management Advisor, Financial Planner CPA Insurance Advisor
Valuation Specialist Exit Strategy Planning SpecialistNo one
professional has all the answers.Diverse skills and talents are
necessary.Team approach minimizes time and cost.3/19/13 ABRAXAS
BUSINESS SERVICES 14Copyright 2012 15. 2. QUANTIFY BUSINESS AND
PERSONAL FINANCIAL RESOURCESPerform a third party valuation of the
business.Perform a needs assessment to determine the amount of
after-tax dollarsneeded to lead the desired lifestyle after exiting
the business.Do the combined business and personal financial
resources meet yourobjectives?3/19/13ABRAXAS BUSINESS
SERVICES15Copyright 2012 16. 3. MAXIMIZING AND PROTECTING BUSINESS
VALUEBenefits to the Owner:Increase enterprise value by creating
and enhancing the value drivers of thebusiness.Tax strategy -reduce
income taxes upon sale of business.Protect assets from potential
business and personal creditors.Motivate and keep key
employees.Create ability to sell the business.3/19/13ABRAXAS
BUSINESS SERVICES 16Copyright 2012 17. 3. MAXIMIZING AND PROTECTING
BUSINESS VALUEValue Drivers:Proven management team.Consistent
financial performance; upper quartile relative to peers.Realistic
growth strategy.Market defensibility.Reliable operating systems,
processes and financial controls.Product
differentiation.Proprietary technology.Established and diversified
customer base.Established and diversified vendor base.3/19/13
ABRAXAS BUSINESS SERVICES 17Copyright 2012 18. 3. MAXIMIZING AND
PROTECTING BUSINESS VALUEProcess:Assess industry structure, the
balance of power of your business (SupplierPower, Buyer Power,
Competitive Rivalry, Threat of Substitution and Threatof New
Entry).Perform a SWOT (Strengths, Weaknesses, Opportunities and
Threats)analysis of the business.Analyze competitive position,
advantages and value drivers of the business.Review operating
systems and processes.Assess human resources, asset and capital
requirements.Assess value creation alternatives.Develop a strategic
plan to enhance the value drivers of the business andaddress
weaknesses and threats; positioning the business to achieveoptimum
value on an after tax basis.3/19/13 ABRAXAS BUSINESS SERVICES
18Copyright 2012 19. FIVE FORCES BALANCE OF POWERThreat of New
Entry:Competitive Rivalry:Cost advantagesThreat Number of
CompetitorsEconomies of scale of New Quality differencesTime and
cost of entryEntry Customer loyaltyBarriers to entry Switching
costs Supplier Power CompetitiveBuyer PowerRivalrySupply
Power:Number of suppliers Buyer Power:SizeNumber of customersCost
of ChangingPrice sensitivityAbility to substituteThreat of
Substitute:Threat ofCost of Change SubstitutePerformance3/19/13
ABRAXAS BUSINESS SERVICES 19Copyright 2012 20. SWOT
ANALYSISStrengths:Weaknesses:What do others see as your strengths?
What factors lose you sales?What do you do well?What could you
improve?What advantages do you have?Where do you have fewer
resources?What unique resources do you have?What do others see as
weaknesses?Opportunities:Threats:What opportunities are open to
you? What trends can harm you?Take advantage of current trends?
What is your competition doing?Can you turn your strengths intoWhat
threats do your weaknessesopportunities?expose you
to?3/19/13ABRAXAS BUSINESS SERVICES 20Copyright 2012 21. 3.
MAXIMIZING AND PROTECTING BUSINESS VALUEPossible
recommendations:Management Team Development Plan.Profit margin
improvements (outsourcing processes, procurement costs,pricing,
production improvements, cost reductions, acquisitions).Key
Employee Incentive Compensation Plan (stock bonus,
stockappreciation rights, non-qualified compensation plan, cash
bonus).Separation of business assets from business operations.Non-
solicitation, Non-compete agreements.Wealth transfer to children
during owners lifetime.3/19/13ABRAXAS BUSINESS SERVICES21Copyright
2012 22. 4. OWNERSHIP TRANSFER SELLING TO THIRD PARTIESBenefits to
Owner:Cash at closing.Eliminate or reduce financial risk.No family
succession issues.Speed of exit.3/19/13 ABRAXAS BUSINESS SERVICES
22Copyright 2012 23. 4. OWNERSHIP TRANSFER SELLING TO THIRD
PARTIESConsiderations:Ability to sell and business value determined
by: Intrinsic Value: the value drivers Extrinsic Value: the value
the market places on the business Effectiveness of the sale
processM&A Marketplace: Success rate is one out of four
actually sells(1) Success rate for businesses with sales of $10
million one out ofthree(1) Success rate for businesses with sales
above $10 million 50-50(1)Positioning the business for sale,
pre-sale due diligence and tax planning.(1) 2005 Business Reference
Guide by Tom West3/19/13ABRAXAS BUSINESS SERVICES23Copyright 2012
24. 5. OWNERSHIP TRANSFER - SELLING TO INSIDERSBenefits to the
Owner:Achieves exit objective of: Selling to key employee group
Transferring to a relativeMotivates and retains key
employees.Planning reduces risk and increases amount of cash
received by minimizingthe tax consequences for both the seller and
buyer.3/19/13 ABRAXAS BUSINESS SERVICES 24Copyright 2012 25. 5.
OWNERSHIP TRANSFER - SELLING TO INSIDERSThe 5 Rules of Engagement
for Insider TransfersDo not take an inordinate amount of risk on
the front end.Do not give up control until receiving the last
dollar.Shorten the timeline as much as possible.Minimize taxes for
both parties.Utilize the cash flow of the business as efficiently
as possible since that is theresource paying for the
transfer.3/19/13ABRAXAS BUSINESS SERVICES25Copyright 2012 26. 5.
OWNERSHIP TRANSFER - SELLING TO INSIDERSSale to a Third Party for
Cash: Fair Market Value = $10,000,000 Cash Flow = $2,500,000
BuyerOwner Cash for purchase$8,000,000 Net of Tax3/19/13ABRAXAS
BUSINESS SERVICES26Copyright 2012 27. 5. OWNERSHIP TRANSFER -
SELLING TO INSIDERSSale to Employee for Installment Note: Fair
Market Value = $10,000,000 Cash Flow = $2,500,000 Employee Cash
flow from business $2,500,000 - $1,500,000 (net Owner of taxes)
Cash to Owner $1,200,000 $8,000,000 Net of Tax (net of taxes)
Timing: 7 9 years3/19/13 ABRAXAS BUSINESS SERVICES 27Copyright 2012
28. 5. OWNERSHIP TRANSFER - SELLING TO INSIDERSTransfer to Employee
Phase 1: Fair Market Value = $5,000,000 - $10,000,000 Cash Flow =
$2,500,000EmployeePurchased 40% for $2,000,000 Owner($1,000,000 of
cash flow per $480,000 Net of Taxyear to employee)$1,440,000 After
3 YearsOwnerOwnerCash flow from business$900,000 Net of
Tax$1,500,000 $2,700,000 After 3 Years3/19/13ABRAXAS BUSINESS
SERVICES28Copyright 2012 29. 5. OWNERSHIP TRANSFER - SELLING TO
INSIDERSTransfer to Employee Phase 2: Fair Market Value =
$5,000,000 - $10,000,000 Cash Flow = $2,500,000 Owner $4,800,000
Net of TaxEmployeePurchased 60% for $6,000,000 Owner $8,940,000
After 3 YearsTiming: 3 years3/19/13ABRAXAS BUSINESS
SERVICES29Copyright 2012 30. 5. OWNERSHIP TRANSFER - SELLING TO
INSIDERSPossible recommendations:Sale of ownership interest (cash,
note or bank financing).Bonus or gift of ownership interest.Grantor
Retained Annuity Trust (GRAT).Non-qualified deferred compensation
plan (409a).Buy back agreement for minority owner.3/19/13ABRAXAS
BUSINESS SERVICES 30Copyright 2012 31. FAMILY SUCCESSION ISSUESOnly
one third of family businesses are passed to the second
generationOnly 10% are passed to the third generationLess than 4%
are passed to the fourth generationReasons:Children may not get
alongDifferent career goalsInability for parents to achieve
financial goalsUnable to run the business3/19/13ABRAXAS BUSINESS
SERVICES31Copyright 2012 32. INGREDIENTS OF SUCCESSFUL FAMILY
TRANSFERA written plan Defines financial independence Defines
fairness in distribution TimelineOnly one child becomes sole
successor or at least controlBusiness transition plan is fair to
allParents achieve financial security independent of the
businessBusiness active child demonstrates the ability and
willingness to run thebusinessThere is a backup Plan
B3/19/13ABRAXAS BUSINESS SERVICES32Copyright 2012 33. INGREDIENTS
OF SUCCESSFUL TRANSFERReasons for backup Plan B:Value increases to
a point a buyout is financially too difficultIncrease in value
exceeds value of other assets fairnessBusiness becomes too complex
or sophisticated for one childChild loses interest or becomes
ill3/19/13 ABRAXAS BUSINESS SERVICES33Copyright 2012 34. 6.
BUSINESS CONTINUITY PLANNINGBenefits to the Owner:Objectives can
still be achieved if you do not survive your exit.Retains ownership
and control of business if co-owners depart.Can force
non-contributing owners to leave the business.Provides consistency
between lifetime and death objectives.Ensures survival of the
business for the benefit of others by: Addressing continuity of
ownership Addressing the potential loss of financial resources
Addressing loss of key talent, customers and vendors3/19/13 ABRAXAS
BUSINESS SERVICES 34Copyright 2012 35. 6. BUSINESS CONTINUITY
PLANNINGPossible Recommendations:Review and update continuity
guidelines.Review and update Buy-Sell (Shareholder) Agreement
Valuation Funding mechanism Address voluntary and involuntary
terminationInsurance for continuity planning.Stay bonus plan.Plan
for financial independence of the business.3/19/13ABRAXAS BUSINESS
SERVICES 35Copyright 2012 36. 7. PERSONAL WEALTH AND ESTATE
PLANNINGBenefits to the Owner:Preserve wealth, minimize taxes using
both lifetime and death planningtools.Coordinates and integrates
lifetime exit objectives with the estate plan.In effect, estate
planning becomes part of the business planning.3/19/13 ABRAXAS
BUSINESS SERVICES 36Copyright 2012 37. 7. PERSONAL WEALTH AND
ESTATE PLANNINGPossible Recommendations:Personal asset protection
planning.Personal and family insurance.Transferring of specific
non-business assets.Personal wealth management plan.3/19/13ABRAXAS
BUSINESS SERVICES 37Copyright 2012 38. REALITYEventually every
owner will exit their business voluntarily or otherwise. ProperExit
Strategy Planning will enable you to have an element of CONTROL:
transition under your time framemaximize the after-tax value of
your businessensure continuity in case of an unexpected eventassure
financial security for you and your family3/19/13 ABRAXAS BUSINESS
SERVICES 38Copyright 2012
