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March 27, 2012 Business Owners Symposium. Includes discussion of Sellability.
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Business Owner Symposium
March 2012
Welcome & Symposium Overview
Kevin Donovan
Key Private Bank
Objective: Help business owners make wise financial decisions.
Obstacle: Complexity – No one person or organization can be an expert on everything.
Proposed Solution: Extensive team of specialists in a wide range of business & personal financial issues.
Business Owner Symposium
Business Owners & Exit Plans
52%
39% 39%43%
0-3 Yrs 4-6 Yrs 7-10 Yrs 10+ Yrs
Business Owners with a Succession Plan (May 2010)
Years Until Exit: % of Business Owners With a Plan
41% Have a Succession
Plan59% Have No Succession
Plan
Dangers of Not Having a Plan
• Leave money on the table at sale• Not able to afford the lifestyle you’d like in retirement• Pay too much money in taxes• Inability to create the legacy that you would like
A study of 300 former business owners who recently sold their companies showed that 75% of them felt the sale did not accomplish their personal or financial objectives.
Initial Financial Planning Considerations
Chris Fout, CFP®
Senior Financial Planner
Key Private Bank
Financial Philosophy
“He who fails to plan, plans to fail.”
Initial Financial Planning Considerations
1. Cost of Living – How much money does it take for you to live currently, and how much do you anticipate you will need in retirement?
2. Business Transition – How? When? To whom?
3. Net Worth – Personal financial information including assets, liabilities, and future inflows/outflows.
Personal Retirement Planning
• How much do you need to “net” from the sale of your business to be financially independent?
• How does this number (above) compare with a current business valuation?
• Prior to any consideration of a sale, it is crucial to know both what you need and what your business is worth.
Personal Retirement Planning
Example: Bob and Susan• Own a large hardware store• Want to sell the business• Spending need is $120,000• Higher expenses in the first 5 years for travel and a
remodel of their vacation home• Have an offer for $2,500,000• Additional savings of $500,000
Today's Dollars
Year ofRetirement
Annual retirement spending goals $ 120,000 $ 120,000
Total resources needed to fund goals $ 4,000,216 $ 4,000,216
Maximum attainable annual retirement spending $ 90,087 $ 90,087
Total resources available to fund goals $ 3,000,000 $ 3,000,000
It is projected that your current resources will fund about 75.01% of your retirement spending goal.
Your retirement spending is projected to look like this:
Current Funding 75.01%
Shortfall 24.99%
Retirement Spending Goal (Assuming $2.5mil Business Value)
Retirement Spending Goal (Assuming $6mil Business Value)
Today's Dollars Year ofRetirement
Annual retirement spending goals $ 120,000 $ 120,000
Total resources needed to fund goals $ 4,000,216 $ 4,000,216
Maximum attainable annual retirement spending $ 192,678 $ 192,678
Total resources available to fund goals $ 6,500,000 $ 6,500,000
It is projected that your current resources will fund about 162.46% of your retirement spending goal.
Your retirement spending is projected to look like this:
Current Funding 162.46%
Shortfall 0.00%
Business Valuation
Lance Fenton, CPA, CVAPartner
Cooper Norman
Business Valuation
• Purpose of a Valuation• Tax versus Non-Tax
• Valuation Methods• B/(R-G)=V
• B = Benefit Stream• R = Risk• G = Growth Rate• V = Value
• The Valuation Process
Business Valuation
The Sellable Business
David C. Smith
Maximizing the Value of Your Business
High growth prospects Larger company size Long, successful track record Steady earnings growth Management succession in place Diversified customer / supplier base Unique product or service
Low growth prospects Small company size Minimal financial history Volatile earnings Management succession in doubt Concentrated customer / supplier base Generic product or service
WHAT DOES A POTENTIAL BUYER WANT?
VALUE
VALUE
Sellability
Is your business “sellable”?
GrowthProfit-ability
Sustain-ability
Risk
Sellability: Growth
Action: Identify strategic areas of growth (i.e. acquiring new customers, complimentary products / services, new locations)
19
GrowthProfit-ability
Sustain-ability
Risk
Action: Create and manage the systems in your business that produce consistent results and increase effectiveness.
20
Sellability: Profitability
GrowthProfitability
Sustain-ability
Risk
The One Thing…..
21
Sellability: Profitability
GrowthProfitability
Sustain-ability
Risk
Growth
22
Sellability: Sustainability
GrowthProfit-ability
Sustain-ability
Risk
Action: Identify and implement key systems. Ensure business assets can transfer to new owner.
23
Sellability: Risk
GrowthProfit-ability
Sustainability
Risk
Action: Review financial, legal, environment, competitive, and industry risk and implement mitigation plans.
Exit Strategies
Denver • Boise • Boston • Burlington • Chicago Greenwich � Newport Beach Pittsburgh San Francisco • Washington DC � �
• West Palm Beach
Thomas H. McConnellDirector
Overview
Privately owned, multi-disciplinary investment banking firm.
The leading firm for serving the private wealth industry in North America, working with entrepreneurs and business owning families, in partnership with:
National footprint; global reach
Over $15 billion of middle market deals and over $75 billion of deal experience.
Extraordinary debt and equity capital market access for private companies; broadglobal reach for buyer and seller access.
DEAL OF THE YEAR INVESTMENT BANK
OF THE YEAR
- Bank of America / Merrill Lynch- Barclays Wealth- Credit Suisse
- Deutsche Bank- Goldman Sachs- UBS
NATIONAL FOOTPRINT, GLOBAL REACH
West Palm Beach
ChicagoWashington DC
PittsburghGreenwich
BostonBurlington
DenverNewport Beach
San FranciscoBoise
Mexico City
Bogota
Rio de Janeiro
Johannesburg
MadridBarcelona
Bologna
London
MilanParis
S- Hertogenbosch
Stockholm
FrankfurtWarsaw
Moscow
IstanbulLyon
Torino
Bilbao
San Sebastian
Nottingham
Birmingham
Bangalore
Mumbai
Melbourne
Tokyo
New Delhi
Kolkata
Mauritius
International/Cross-Border
Deal of the Year
North America: 11 offices 70 bankers
Internationally: 30 offices in 17 countries 170
bankers
Headwaters MB
Investment Banking
Integrated Business Services
Headwaters Capital
Partners
Family Office Direct Investment
FULL SERVICE INVESTMENT BANK AND ADVISOR
• Investment banking and advisory services for middle market companies seeking liquidity for owners, capital for growth, or advice on value enhancement and transitioning through generations
• Proprietary capital for private companies in upper middle market across all industries
Services Capital
THE TRANSITION WAVE 2011-2025
During the next 15 years, the private owners of 83% of middle market companies will either have to decide to transition their companies to the next generation of owners / executives or to monetize their ownership interests and turn over succession management and business transition to a new owner.
This represents over 40,000 companies (revenue $25mm+) with roughly $5 trillion of enterprise value.
IMPROVING ECONOMIC CONDITIONS IN THE U.S.
PRIVATE EQUITY DRY POWDER
Source: Thomson Reuters: Thomson One
Approximately $450 billion in equity capital
4,300 private equity investments are now at least 3 years old
Median time from buyout to exit is 4.8 years
Most prevalent in business products and services, consumer products and services, IT, and healthcare, Also invested in financial services, energy and materials and resources.
PRIVATE EQUITY IS UBIQUITOUS
Source: Pitchbook
STRATEGIC BUYERS CASH RESERVES
Source: Bianco Research LLC
IMPROVING LENDING ENVIRONMENT
Source: GF Data
John WilliamsonKey Commercial Bank
Credit Market Update
• Credit is available
• Consider Risk vs. Reward and set realistic expectations with your credit partners
• Structure is crucial
• There is more to a credit deal than price
• Credit partners / advisors are essential
• There is a difference between a Banker and a Lender• Banks can and should work with non bank providers of credit• Relationships are built over time
HIGHER MULTIPLIES FOR LARGER COMPANIES
Source: FactSet
Valuation Gap- Today’s market: Robust
demand for high quality/prepared companies
- 11% price premium
HIGHER MULTIPLES FOR PREPARED COMPANIES
Source: GF Data Resources
TOTAL US M&A DEAL VOLUME
Source: GF Data
What Happened in 2011?
- Economic uncertainty
- European debt crisis
- Political and regulatory uncertainty
- Slower improvement in middle market vs. multinationals
Why Things Will Pick-Up in 2012/2013:
- Improving economy
- Renewed optimism (reflected in stock and bond prices)
- Anticipated capital gains tax increases in 2013
- Presidential election will help resolve political uncertainty
- PEGs pressured to deploy capital (use it or lose it)
- Moderate GDP growth=> strategic need acquisitions to achieve growth targets
- Supply/demand imbalance
- Baby boomer exits
CURRENT MARKET CONDITIONS
STRATEGIC BUYER VS. PRIVATE EQUITY
THE RE-EMERGENCE OF THE PRIVATE EQUITY BUYER
EV/EBITDA for Private Equity vs. Strategic Buyers
Source: Capital IQ
How to decide?- Determine your transactional goals and objectives (financial and nonfinancial)
• Seeking partner or near term exit?- Evaluate the probable level of private equity interest
• Profit margins (EBITDA)• Growth prospects• Differentiated product or service offering• Platform or add-on• Reviewed or audited financial statements• Management team
- Evaluate the probable level of strategic interest• Complementary customer base• Complementary geographic areas (could allow entry to new market or be
overlapping)• Potential for economies of scale (cost savings)• New product lines or access to new technology
- Go to market and choose based on empirical data
PRIVATE EQUITY VS STRATEGIC BUYER
PROCESS ALTERNATIVES
PROCESS
Day1 30 60 90 120 150 180
Key Events
Pre-Marketing PhaseInitial Diligence
Preparation of Confidential Memorandum "CM"
Creation of Buyer List
Finalize Teaser and NDA
Contact Potential Buyers, Negotiate and Execute NDAs
Preparation of Online Data Room
Marketing Phase
Distribution and Review of CM
Preparation of Management Presentation
Rehearse Management Presentations
Receive / Evaluate Initial Indications of Interest
Purchase Agreement "PA" Prepared and Distributed
Buyer Diligence and Data Room Access
Management Presentations
Respond to Continued Diligence Inquiries
Closing PhaseReceive and Evaluate Final Indications of Interest
Negotiate with Lead Parties and Conclude Due Diligence
Execute SPA
Satisfy Regulatory, Administrative and Consent Requirements
Closing
Pre-Marketing Marketing Closing
Income Tax Considerations When Selling
Lance Fenton, CPA, CVA
Cooper Norman
Tax Brackets
Tax Rates
Corporate Income Tax Rates
If taxable income… …tax is… …of amount over
$0 - $50,000 15% $0
$50,000 - $ 75,000 $7,500 + 25% $50,000
$75,000 - $100,000 $13,750 + 34% $75,000
$100,000 - $335,000 $22,250 + 39% $100,000
$335,000 - $10,000,000 $113,900 + 34% $335,000
$10,000,000 - $15,000,000 $3,400,000 + 35% $10,000,000
$15,000,000 - $18,333,333 $5,150,000 + 38% $15,000,000
Over $18,333,333 $6,416,667 + 35% $18,333,333
Personal service corporations taxed at flat 35% rate.
What Type of Entity Do You Use To Conduct Business?
• Pass-through Entities• Sole proprietorship• Partnership• Limited liability company (“LLC”)• S corporation (BEWARE BUILT-IN GAINS!)
• Pass-through entities offer more flexibility in negotiating the terms of the sale.
• C corporations can trigger double taxation upon the sale of business assets and subsequent distribution to owners.
What Do You Have to Sell?
Selling Assets or Stock
• Buyers prefer purchasing assets
• Sellers prefer to sell stock
Selling Assets or Stock
• Buyers prefer purchasing assets
• Tax basis = purchased price (basis step up)• Future tax deductions
• Little or no risk that they will assume any unknown seller liabilities. • Seller still owns the corporation !!
• Need to dispose of in some fashion?
Selling Assets or Stock
• Sellers prefer to sell stock • Capital gain treatment on the sale.
• In a stock sale:• Buyer gets no step-up in the asset basis• Seller often indemnifies buy against past actions
Capital Gains/ Dividends
** After 2012, dividends treated as ordinary income, potential taxed at 39%
- 25% rate still applies to RE depreciation recapture
- 28% rate still applies to Collectibles
Tax Bracket 1/1/01 – 5/5/03 5/6/03 - 2007 2008 - 2012 2013 **
10% and 15% 8%/10 5% 0% 10%
25% and above 20% 15% 15% 20%
Allocation of Purchase Price – Asset Sale
• Federal Ordinary Income Rates 15% to 35%.
• Federal Capital Gain Rates 0% to 15% (general rule)
• Which rate do you want to Pay ???
Allocation of Purchase Price
• Ordinary Income Items:• Accounts Receivable (cash basis taxpayer)• Inventory• Depreciation Recapture
• Capital Gain Items:• Land• Investments • Etc
• Seller wants price allocated to Capital Gain Items• Buyer generally like to allocate purchase price to shorter-lived
assets such as receivables, inventory and equipment.
Additional Payments to Seller – Personal Goodwill
• Buyer pays one amount for the corporate stock • Buyer pays other amounts directly to the owners for
• Consulting• Covenant not to compete• Interest• Property rentals• Intellectual property• Licenses
• Advantage to Seller is generally a disadvantage to Buyer
• Personal Goodwill • Long-term capital gain to the seller / 15 year write-off to buyer • Who owns the Goodwill – Business or Individual ??
• IRS can challenge the allocation !!!!
Installment Sale
• Installment Sales
• Earnout / Contingent Payments
• Tax Deferred Exchanges
• State and Local Tax Issues??
Sustainable Income / Wealth Preservation
Chris Fout, CFP®
Senior Financial Planner
Key Private Bank
Sustainable Income / Wealth Preservation
• How do I “get paid” after I stop working?
• Accumulation Phase (Wealth Creation) vs.
Distribution Phase (Wealth Preservation)
• Minimizing Risk
Legacy Planning
• Where do you want your money to go?• Heirs• Charitable organizations• IRS
• Determine the surplus
• The sooner the planning is done, the better the results
Questions?
Disclosures
United States Treasury Department Circular 230 Disclosure – To ensure compliance with requirements imposed by the IRS, we inform you that, unless expressly stated otherwise, and U.S. Federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under Internal Revenue Code of (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
IRS Circular 230 notice: Any tax advice contained herein was not intended or written to be used, and cannot be used, by you or any other person (i) in promoting, marketing or recommending any transaction, plan or arrangement or (ii) for the purpose of avoiding penalties that may be imposed under federal tax law.