TRANSITION YOUR LIFE TRANSITION YOUR BUSINESSowner’s retirement plans Demographics suggest that there will be more sellers than buyers in the ... Estimate post-Retirement Income

TRANSITION YOUR LIFETRANSITION YOUR BUSINESS

TODAY’S AGENDA

• Planning for the Ownership TransitionFrank O’Shea, BerryDunn

• Financial ReadinessLauren Epstein, Acadia Trust

• Transaction OptionsNelson Toner, Bernstein Shur

• Break • Financing

Elliott Barry, Camden National Bank

• Valuation ConsiderationsSeth Webber, BerryDunn

• Panel Discussion

2

WHY IS IT SO IMPORTANT TO PLAN ?

For most owners, the transition of their business is a once-in-a-lifetime event

The proceeds from the transition of the business are important to most owner’s retirement plans

Demographics suggest that there will be more sellers than buyers in the marketplace

A written transition plan can:

Improve financial stability and increase business value

Provide for development of successor owners

Maintain employee and family harmony

3

4

THE OWNERSHIP TRANSITION

OWNER READINESS TO EXIT

FinancialReadiness

5

Low High

Low

High

Mental Readiness© Copyright 2012, Pinnacle Equity Solutions, Inc.

FINANCIAL READINESS

What assets have I accumulated outside the business to support my post exit lifestyle?

What will my post exit lifestyle require in terms of financial resources?

What percentage of my total net worth is currently tied up in the business?

What is the financial gap to be filled from the disposition of my ownership in the business?

Will the gap be filled by my desired exit option?

6

MENTAL READINESS

How involved am I in the day-to-day running of the business?

Do I have a plan on how I will spend my leisure time away from the business?

Do I view the business as providing a good return on invested capital, or am I more interested in the lifestyle that the business provides?

Will I be able to think clearly throughout the transition process and make clear and objective decisions?

7

OWNER TYPES BY READINESS

FinancialReadiness

8

Low High

Low

HighWell-off but

choose to work

Stay & Grow

Rich & Ready to Go

Get me out atHighest Price


EXIT OPTIONS VS. READINESS

9

Low High

Low

HighMBO, Gift,

ESOP

PEG Recap,ESOP, Grow Bus.,Increase Savings

Gift, Charity,ESOP, Sell

Sell Business for ‘Highest Price’

Mental Readiness

FinancialReadiness

© Copyright 2012, Pinnacle Equity Solutions, Inc.

MAKING AN OWNERSHIP TRANSITION DECISION

6 STEPS

10

Establish Exit Goals

Measure Financial Readiness

Identify the Type of Exiting Owner You Resemble

Measure Mental Readiness

Learn and Choose Your Exit Option

Understand the Value of the Option You Choose

Execute Your Exit Strategy Plan© Copyright 2012, Pinnacle Equity Solutions, Inc.

ESTABLISH EXIT GOALS

What do I want to achieve with my business transition?

What do I want my legacy to be?

How will the transition affect employees, customers, the community?

How long will I continue to own the business and what role do I want to play?

How will I spend my time away from the business after I transition?

11

Lauren Epstein, Esq.

Americans live for an average of 18.7 years after age 65 Inflation cuts the value of your money in half every 22 years. The average Social Security retirement payment is just

$1,269 a month. 46% of Americans have less than $10,000 saved for

retirement. (Employment Benefit Research Institute) 40% of baby boomers now plan to work until they die.

(AARP) There is sometimes an assumption that expenses go down

in retirement – not always true.

Early planning provides enhanced benefits

Establishing a goal with concrete action steps is important

As retirement nears, consider a three-part focus:◦ Budgeting for Retirement◦ Investments in Retirement◦ Estate and Incapacity Planning

Estimate post-Retirement Income (from all sources)◦ Social Security◦ Spousal survivor income from SS or pensions◦ Annuities◦ Cash flow from sale of business interest◦ Interest and dividends from investments◦ Pensions/IRAs ◦ Part-time employment

Estimated post-Retirement Expenses◦ Difficult to accurately forecast◦ Best Approach – detailed budget with periodic revisions◦ Rule of Thumb – about as much as you spend before retirement

Creating a Personal Balance Sheet, Income Statement and Statement of Cash Flows

Include both ordinary and necessary expenses, as well as all anticipated discretionary expenses (Trips, Activities, Hobbies, etc.)

Medical and Dental Expenses Assistance to Family Members Replacement Costs - Roof, Furnace, House Painting,

Automobiles Downsizing Costs Taxes on Retirement Distributions Long-Term Care Expenses

Impact of Spending on Investment Assets◦ A plan to maintain principal◦ Income Generation versus Total Return◦ Determination of wealth accumulation for retirement

Commonsense Ideas to Stretch Retirement Dollars◦ Reevaluate ongoing expenses to find potential savings◦ If your financial outlook is constrained, it pays to be frugal◦ Periodically maintain and update your budget – promptly

address variances, and explore ways to reduce expenses

After selling your business, keep in mind that you may have additional personal expenses. You also may lose eligibility for certain tax deductions. These expenses will need to be factored into your budget. For example:◦ Increased out-of-pocket Health Insurance costs◦ Automobile payments/insurance for vehicle that was

previously used primarily for business purposes◦ No Home Office tax deduction

Understand your goals & create a realistic plan 3% is the new 4%? Reevaluate current investment strategy &

understanding your options Rollover of company plan (403(b), 401(k), etc.) into

IRA (Understanding retirement distribution rules)

Tax planning Simplification Investment vehicles & options

Investing to Meet Goals & Spending Requirements (Budget)

Tax Deferred vs. Tax Exempt vs. Taxable Accounts Types of Investments◦ Stocks◦ Bonds◦ Mutual Funds◦ Exchange Traded Funds◦ Alternative Investments◦ Annuities◦ Bank Products (Money Market Funds and Certificates of

Deposit)

Source: Investopedia.com

Investment decisions and strategies are based on the individual investor’s risk profile

There is no one-size-fits-all investment strategy Diversification of asset classes Risk tolerance is a personal decision, and may be based on

a variety of factors, including:◦ Age◦ Overall net worth◦ Foreseeable (and unforeseeable) needs◦ Market conditions ◦ Investing experience

Your investment strategy should not cause you anxiety or sleepless nights!

Insurance is a very effective tool to mitigate potential risk factors and decrease your personal liability for unanticipated expenses.

Measuring the type of risks that can potentially wipe you out financially:

“The greater the result of the formula, the less able an individual is to assume any given risk and the more he or she needs to insure the risk.”

Personal Financial Planning, Seventh Edition

Total amount at stake or potential liabilityRelative value of risk =

Total Wealth

A comprehensive estate plan allows you to accomplish several goals during your lifetime and after your death: Name agents to help with financial matters in the

event of your incapacity Communicate your health-care wishes Transfer your assets at death to your family, friends,

and charitable organizations in accordance with your wishes

Potentially reduce or eliminate estate taxes

Durable Financial Power of Attorney

Advance Health Care Directive

Trusts

Last Will & Testament

A financial power of attorney allows you to name an agent who has the legal authority to manage your finances and assets in the event that you are unable to do so.

An advance health care directive (medical power of attorney) allows you to name an agent who will be responsible for making health care decisions as well as ensure that your wishes are carried out regarding a variety of medical decisions, such as artificial nutrition and hydration, funeral arrangements, life support, etc.

If you do not have a Will, any assets held in your name alone will be distributed in accordance with the Maine laws of intestacy. This may or may not reflect your wishes. There are many benefits to having a Will, including: Directing the distribution of probate assets. Allowing you to make charitable gifts or other bequests. Nominating a guardian and/or conservator for a disabled

or minor child. Nominating a personal representative in the Will who will

be responsible for administering your estate.

What is a Trust?A trust is a legal arrangement where a fiduciary (Trustee) holds and administers assets for the benefit of beneficiaries. Like a person, a trust can own property such as real estate, a bank account, or investments.• Settlor/Grantor: the person who establishes and funds the trust• Trustee: the person or entity that manages and administers the

trust assets and makes distributions in accordance with the terms of the trust

• Beneficiary: the person or entity that is entitled to receive a something from the trust in accordance with its terms (e.g. receiving distributions of income/principal or using the trust assets)

What is the Purpose of a Trust?• To minimize estate tax liability• To plan for incapacity• To provide for loved ones long after your death• To protect the inheritance of a beneficiary from his or her

creditors• To provide for elderly or incapacitated beneficiaries• To carry out charitable wishes• To protect and manage real estate or other assets for

many generations

Revocable Living Trusts Testamentary Trusts Minors’ Trusts Generation-Skipping Trusts Irrevocable Life Insurance Trusts Realty (“Camp”) Trusts Supplemental Needs Trusts Charitable Remainder Trusts Defective Grantor Trusts

Most common type of trust for married couples who have taxable estates.

During Settlor’s lifetime and capacity, revocable and amendable.

After Settlor’s death, living trust generally divides into subtrusts, usually based on estate tax law in effect at that time.

Subtrusts can be for the benefit of the surviving spouse (marital trust), and/or children (family trust).

After a “triggering event” (e.g. death of surviving spouse, children attaining a certain age) subtrust can terminate and be distributed in accordance with its terms.

Create a realistic budget for now and post-retirement. Consider all sources of income and your anticipated (and unanticipated) expenses.

Pay down debt before retirement, such as mortgages, loans, credit card debt, medical debt, etc. to reduce your expenses.

Meet with a financial advisor to discuss your long-term and short-term financial needs. Discuss your risk tolerance to develop a comprehensive financial strategy.

Meet with an insurance professional to review your property, life and health insurance needs and increase (or decrease) coverage where necessary.

Meet with an estate planning attorney who can review your current estate planning documents and suggest updates or planning opportunities.

Lauren [email protected]

www.acadiatrust.com

Acadia Trust, N.A. is a national banking association chartered under the laws of the United States with a limited purpose trust charter, a wholly owned subsidiary of Camden National Corporation, and an affiliate of Camden National Bank and Camden FinancialConsultants, located at Camden National Bank. The Company does not affect transactions in securities or render personalized investment advice via this presentation or the Company’s website. Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment, investment strategy (including the investments and/or investment strategies recommended and/or purchased by advisor), or product made reference to directly or indirectly in this presentation, will be profitable or equal to corresponding indicated performance levels.

The information in this material has been obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed. The opinions, estimates, and projections constitute the judgment of Acadia Trust and are subject to change without notice. This commentary is for information purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or a recommendation or determination by Acadia Trust that any investment strategy is suitable for a specific investor. Different types of investment involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client’s investment portfolio. No client or prospective client should assume that any information presented and/or made available in this presentation serves as the receipt of, or a substitute for, personalized individual advice from the advisor or any other investment professional.

Any charts, graphs or tables used in this letter are for illustrative purposes only and should not be construed as providing investment advice.

Indices are not available for direct investment. Any investment in a strategy or security designed to mimic the performance of an index will incur fees, such as management fees and transaction costs that will reduce returns. Investing involves risk and you may incur a profit or a loss. Past performance is no guarantee of future results. Diversification does not ensure a profit or guarantee against a loss. There is no assurance that any investment strategy will be successful.

Any products discussed in this presentation are not insured by the FDIC or any other governmental agency, are not deposits of orother obligations of or guaranteed by Camden National Bank, Acadia Trust, or any other bank or entity, and are subject to risks,including a possible loss of the principal amount invested. Some investment products may be available only to certain qualified investors - that is, investors who meet certain income and/or investable assets thresholds.

Third-party trademarks and brands are the property of their respective owners.

Transaction Options

Nelson Toner

How the Business Will be TransitionedApproaches to Transition a Business include:1. Equity Transaction – Sale, Transfer of Gift of

the Stock or Ownership Interests (focus on the ownership)

2. Asset Transaction – Sale of all or some portion of the Business assets (focus on the assets)

3. Termination Transaction – Liquidation of the Business

4. Hybrid Transaction – A combination of some or all of the above Transactions

To Whom the Business Will be Transitioned

The successors to the Business can include:1. Family Members2. Other Owners of the Business3. Management and other Key Employees4. Outside Investors (Strategic and Financial)

The ownership can be direct or indirect, including the use of other business entities, such as trusts, retirement vehicles, and limited liability companies.

Structuring the TransactionThe structure of the succession transaction is only limited by the imagination of the transitioning Owner and his or her advisors.

The structure must be designed and implemented to enhance and support the goals and objectives of the transitioning Owner.

And, the structure must be embraced by the successor Owners, who will need to continue the Business.

Structuring the Transaction – Cont’d

Factors that should be considered when planning the succession transaction include:1. Some basic considerations, such as• What is being transitioned and what assets

are components of the transaction?• Determination of the value of Business.• Types of consideration to be paid.• Terms of settlement to complete the

transaction.

Structuring the Transaction – Cont’d

2. Who are the parties to the transaction?3. Should the transitioning Owner retain

control during the period of transition?4. Gathering the team of advisors to help

the transitioning Owner and the team of advisors to the successor Owner(s).

5. Reviewing any Business documents that already exist which provide guidance for the transition transaction.

Protecting the Owner’s AssetsThe transitioning Owner is passing his or her business to someone else. His or her position should be protected from risk as much as possible.1. Buy-Sell Agreements.2. Security for deferred payments.3. Retained control during the transition period.4. Sources for payment from successor

Owners.5. Reduction of any tax liability from

transaction.

Example of Family Business TransitionThe current Owner wishes to pass his or her Business to new Owners. Here are some possible structures:1. Transfer of equity by gift.2. Transfer of equity using an ESOP.3. Transfer of equity using a defective grantor trust.4. Transfer of assets to new business entity owned by

successor Owners.Does the type of structure depend on the identity of the successor Owners? What if the successor Owners are the children of the current Owner? Or, the management of the current Business?

Camden National BankSelling your Business, Will Your Buyer Get a

Loan?

.

Local Decision Makers. Trustworthy Partners

Selling your Business, Will Your Buyer Get a Loan?

Road Map• Bank Overview• Is your business financially ready to be sold?

• Getting ready to sell

• Factors in Getting a Loan• The Buyer• Cash flow • Collateral• Seller’s Expectations

• Credit Enhancements• Sample Transactions• Conclusion

Camden National Corporation Proprietary and Confidential

Camden National Bank Corporate Profile

• Founded: 1875• Assets: $2.6 Billion• Loans: $1.5 Billion• Deposits: $1.7 Billion• Branch offices: 44• Employees: 500• Households and Businesses Served: 98,000• Publically traded:

• NASDAQ ticker CAC• Largest Maine headquartered publically traded bank

• Awards:• Forbes “America’s Most Trustworthy Companies” 2012 & 2013• Recognized leading small business lender for the past 5 years by FAME and

the SBA*As of 12/31/13


Our Value Proposition

• Trusted and knowledgeable bankers, with local market expertise

• Local decision making and local management• Financial stability of Camden National Corporation• Strong credit quality• Strive for market leading customer service, responsiveness and

decisiveness• One experienced local loan officer to handle your small

business, commercial, and investment real estate needs (no changing loan officers due to loan type or loan size)


Selling Your BusinessIs your Business Ready to be Sold?

• Current sales and profitability trends• Identify major drivers of either growth or contraction• Develop a budget/fiscal plan (if you don’t already have one)• By prepared to explain deviations from previous years or plan (either

positive or negative)

• Condition of the balance sheet• Quality of A/R and inventory• Use of line of credit to finance working capital• A/P aging and current standing with the “trade”• Positive retained earnings?• Use of distributions and their explanation• Understand balance sheet leverage, ratio of total liabilities to total equity


Selling Your BusinessGetting Ready to Sell

• Condition of the balance sheet• Pay-down permanent working capital financing, i.e. line of credit• Clean up

• Write-down obsolete inventory• Utilize bad debt expense on dated receivables• The Bank may require a field exam which would discover A/R & inventory issues and

potentially jeopardize the transaction

• Focus on cash flow• As will be discussed this can be a primary determinant in your final sale

price• Balance between managing tax exposure and maximizing the potential

sale price• Work with your trusted advisors, i.e. accountants, attorneys and current Bankers


Selling Your BusinessFactors in Getting a Loan-Buyers

• Experience in the business/industry• Does the customer base know them?• Do they have management experience?

• Personal financial picture is important• Does the buyer have additional funds that can be injected into the

business if necessary?• What is their track record with other debts?• Is there a second source of income (spouse)?


Selling Your BusinessFactors in Getting a Loan-Cash flow

• Operating cash flow (EBITDA) measures the company’s ability to repay debt

• Banks are often looking for a minimum ratio of $1.20 of cash flow for every $1 of debt service (total principal and interest payments).

• For acquisitions this might be closer to $1.40 to $1.

• Operating cash flow will also typically account for minimum capital expenditures to maintain the business’ current revenue.


Selling Your BusinessFactors In Getting a Loan-Collateral

• Depends on the type of business• Asset intensive business will have greater collateral value• Service based business will have less collateral unless real estate is

involved

• Balance of cash flow and collateral• Less cash flow means collateral value is more important• Greater cash flow provides for reduced need for collateral

• Collateral will help determine the length of the amortization• Most acquisition financing is amortized over a 5 to 7 year period• Real estate supported loans can be amortized up to a 25 year period


Selling Your BusinessFactors in Getting a Loan-Seller Expectations

• Depending on the buyer’s financial picture seller could be expected to offer seller financing• This is often seen as quasi equity by the Bank• Needs to be fully subordinated to the Bank and have favorable

repayment terms

• Will the Seller remain with the company• Could be asked by the Bank to guarantee the loan


Selling Your BusinessCredit Enhancements

• SBA and FAME offer loan guarantees• SBA 504 program can provide 90% financing on real estate and

machinery and equipment• SBA 7(a) Guarantee Program has a number of different loan options that

can help facilitate a transaction.• FAME loan insurance can also be used and is often quicker than SBA

approval• Loan amount and collateral are also key determinants• Both SBA and FAME require cash flow

• Favorable seller financing terms are key with these programs• For SBA, it must be on longer amortization schedule than senior debt.


Selling Your BusinessExamples-The Good

• Owners sell 49% to key management then the remaining 51% after three years

• First 49% is financed via a bank loan, with guarantees of current owners and the company. Loan payments covered via increased compensation to the buyers.

• Remaining 51% is financed after the first loan is paid off• Sellers continued to hold the real estate

• Key employee buys 100% of the operating company• Financed with Bank debt and subordinated debt from family member• Subordinated debt acts as the “down payment”• Company’s historical cash flow is strong enough to repay the loan• Seller retains the real estate


Selling Your BusinessExamples-The Bad

• Key executive buys a division of a larger company based on a very high valuation via 100% seller financing

• Company’s performance fails to meet expectations• Sellers end up taking a 75% reduction on note value

• High net worth individual buys a “lifestyle business”• Financed with bank debt and cash equity• Seller stays on to help run the company• Performance falters and buyer and seller do not get along, seller leaves

the company earlier than planned. • Buyer ends up having to put almost all of their personal resources into

the company to keep it alive. Eventually a family member is needed to payoff the Bank.


Selling Your BusinessConclusion

• Preparing your business for sale can increase your sale price• Focus on cash flow• Clean up the balance sheet• Utilize trusted advisors early and often

• The Buyer, Cash Flow & Collateral are major determinants in loan approval• Seller maybe asked to provide seller financing• Be prepared to have seller financing be subordinate to the senior bank

debt

• There are lots of ways to structure a transaction• Final structure depends on seller’s need, business condition and the

buyer• Early flexibility can result in a better long term result


Elliott BarryCamden National BankVice PresidentCommercial Loan Officer(207) [email protected]


Member FDIC

59

WHAT IS MY COMPANY WORTH?

OWNERSHIP TRANSITION STRATEGIES

EXTERNAL SALE ALTERNATIVES

Sell The Entire Company“Strategic” and “Financial” buyers

INTERNAL SALE ALTERNATIVES (ALL OR PARTIAL)

Leveraged RecapitalizationLBO, MBO, Recap, Stock Redemption

Gifting to Family

Employee Stock Ownership PlanTax-favored MBO/LBO

60

CHOOSE YOUR EXIT OPTION

61

Low High

Low

HighMBO, Gift,

ESOP

PEG Recap,ESOP, Grow Bus.,Increase Savings

Gift, Charity,ESOP, Sell

Sell Business for ‘Highest Price’

Mental Readiness

FinancialReadiness

© Copyright 2012, Pinnacle Equity Solutions, Inc.

WHAT IS BEING SOLD?

THE FORM OF THE TRANSACTION IMPACTS VALUATION

• Assets

• Equity

• 100%

• Controlling stake

• Minority stake

Net Fixed Assets Other

Liabilities

Equity

Current Assets

Other Assets

Current Liabilities

Long Term Debt

62

LEVELS OF VALUE

Strategic Value

Financial Value, control

Synergies

Assumes control

Financial Value, minority

FinancialControlPremium

Discount forLack of Control

Nonmarketable Minority Value

Discount forLack of Marketability

63

WHAT IS BEING VALUED?

DEPENDING ON WHAT IS BEING SOLD

• Enterprise Value

• Equity Value

• Some portion of the assetsNet

Fixed Assets Other

Liabilities

Equity

Current Assets

Other Assets

Current Liabilities

Long Term Debt

64

WHAT IS VALUE?

• Benefit Stream / Rate of Return = Value

• Benefit Stream x Multiple = ValueMultiples are the inverse of a rate of return

Risk

Value

65

WHAT DRIVES RISK?

FINANCIAL RISK

• Treasury rates

• Equity risk premium

• Size

• Debt/equity ratios

• Industry performance

COMPANY SPECIFIC RISK

• Volatility of earnings

• Financial performance compared to industry

• Depth of management team

• “Key person” risk

• Customer concentration

66

15% 15% 15%

10%5%

0%

5%

10%

15%

20%

25%

Financial Risk Company Specific Risk

4x25%

5x20%

6x16.7 %

APPROACHES TO VALUE

INCOME APPROACH

• Based on Company’s forecast and historic performance

• Relies on developing the appropriate rate of return

MARKET APPROACH

• Compares Company to similar sales in industry

• Relies on multiples as a proxy for risk

67

MAKING AN OWNERSHIP TRANSITION DECISION

6 STEPS

68

Establish Exit Goals

Measure Financial Readiness

Identify the Type of Exiting Owner You Resemble

Measure Mental Readiness

Learn and Choose Your Exit Option

Understand the Value of the Option You Choose

Execute Your Exit Strategy Plan© Copyright 2012, Pinnacle Equity Solutions, Inc.

TYPES OF EXITING OWNERS

FinancialReadiness

69

Low High

Low

HighWell-off but

choose to work

Stay & Grow

Rich & Ready to Go

Get me out atHighest Price


Documents

TRANSITION YOUR LIFE TRANSITION YOUR BUSINESSowner’s retirement plans Demographics suggest that there will be more sellers than buyers in the ... Estimate post-Retirement Income