OWNERSHIP TRANSITION It is expected eight million privately-owned - PowerPoint PPT Presentation

OWNERSHIP TRANSITION  It is expected eight million privately-owned U.S. companies will be sold in the next ten to fifteen years  Advance planning and Thoughtful Guidance can maximize the reward and minimize the transition risk  Owners of architecture/design firms have alternatives for exiting their business, each with Considerations :  Internal parties  Management Buyout  Sale to an ESOP  Buy-Sell Agreements  Related parties  Transfer to Family  Leaseback of Company Real Estate  External parties  Sale to a Third Party  Status Quo page 1

UNIVERSE OF CONSIDERATIONS  Leadership succession  Tax consequences  Transition sustainability  Regulatory compliance OWNERSHIP  Level of future involvement MODEL  Process, confidentiality, and timing  Capital markets environment TIMING, REGULATORY, LIQUIDITY AND AND RISKS DIVERSIFICATION  Shareholder goals  Estate and tax planning  Price, valuation, and  Key management incentives timing  Attract, retain, and reward  Workforce demographics MANAGEMENT COMPANY AND EMPLOYEE  Growth opportunities DYNAMICS NEEDS  Competing capital claims  Debt capacity page 2

INTERNAL PARTY: MANAGEMENT BUYOUT  The existing company management acquires some or all of the company equity DESCRIPTION ▲ Maintaining control during the buyout process ▲ Limiting the business interruption and disruption ▲ Sharing in profits during the buyout process – if structured properly BENEFITS ▲ Reducing the number of outside parties involved in negotiating the transition ▲ Retaining management and employees ▲ Lowering risk by transitioning ownership gradually over time ▼ Risk due to less money up front – slower exit based on earnings/cash flow ▼ Sellers could hold seller notes with little recourse upon default by the buyers ▼ Potentially inefficient tax outcomes CONSIDERATIONS ▼ No gauge as to firm value if had been an outside sale ▼ Existing owners may ask, “Am I buying myself out with my own money?” ▼ Potential high level of scrutiny by creditors page 3

INTERNAL PARTY: SALE TO AN ESOP  An ESOP (Employee Stock Ownership Plan and Trust) is a retirement plan protected by ERISA, and is similar to profit sharing or 401(k) plan DESCRIPTION  Shareholders sell their interests in a transaction to a newly formed ESOP (or via a Company redemption), and if all equity is sold, the Company can achieve tax preferential, 100% S-Corp ESOP status  Selling shareholders can receive any combination of cash, seller notes, or warrants Seller Company Employees ▲ Friendly transaction/minimal ▲ Indirect ownership at no cost ▲ Seller may retain control if desired disruption ▲ Friendly buyer for all or part of ▲ Job retention/business continuity ▲ Retain, reward, attract and motivate equity ▲ Significant retirement plan benefit BENEFITS ▲ Capital gain tax employees ▲ No tax until distribution received deferred/eliminated (C Corp) ▲ Tax deductible stock acquisition debt from ESOP or IRA ▲ Participate in stock allocations (S ▲ Tax exempt shareholder (S Corp) Corp) ▲ Broad-based ownership ▲ More complete estate plan ▲ Creates liquidity for shareholders ▼ Internal funding – unproductive debt ▼ Increased business complexity/annual cost ▼ Company cash flow is crucial ▼ Government regulated shareholder CONSIDERATIONS ▼ Successor management is vital ▼ Repurchase liability planning page 4

INTERNAL PARTY: BUY-SELL AGREEMENTS  Provides the means for a more orderly transfer of ownership at retirement, disability, death, or other specified event DESCRIPTION  Details the terms of the future sale, such as who will have the obligation or option to purchase ownership interests ▲ Stipulates the method to determine the value or price to be paid for ownership interests; generally based upon an independent appraisal of the business ▲ Provides a market for ownership transfers BENEFITS ▲ Details the terms for sale and purchase, i.e., immediate cash payment or payments over time, conversion to shareholder note, etc. ▲ Life insurance can be used to fund untimely death of shareholder ▼ Poorly designed buy-sell agreements can lead to shareholder disputes, such as the “correct” share value ▼ Funds to purchase shares must come from company or other shareholders if not supported by insurance ▼ Could take significant time to receive proceeds CONSIDERATIONS ▼ Value received will likely be less than could be received by strategic buyer page 5

RELATED PARTY: TRANSFER TO FAMILY  Existing owners may gift or sell to family members  Transfer can be completed directly, or indirectly using a trust DESCRIPTION ▲ Legacy of family-owned business is maintained ▲ May provide some liquidity ▲ Seller note from family members provides annual income and return BENEFITS ▲ May provide some tax advantages ▲ Any retained interest provides future upside potential ▼ Seller financing ▼ Tax consequences ▼ Long term process CONSIDERATIONS page 6

RELATED PARTY: SALE LEASEBACK OF COMPANY REAL ESTATE  Sale of the real estate owned and used by a business to a real estate investor  The company then leases the real estate back from the real estate investor under long-term leases DESCRIPTION  Provides liquidity to shareholders without requiring them to sell the company, though it does increase the business’s operating costs ▲ Provides partial liquidity for shareholders ▲ Shareholders retain upside via their shares in the company BENEFITS ▲ Maintains access to debt capital to fund growth and more fully exploit current opportunities ▼ Requires a significant real estate portfolio to be sold to justify time and expense ▼ Universe of qualified, interested buyers likely very limited ▼ Loss of ownership, control, and value as collateral of the company’s former real estate ▼ Introduces a third-party partner ▼ Process can potentially disrupt management CONSIDERATIONS ▼ Potentially extensive third-party due diligence process ▼ Requires sharing confidential information with third parties ▼ Lease payments may create a strain on the financial resources of the company ▼ Tax attributes of the transaction must be carefully managed to avoid potential double taxation page 7

EXTERNAL PARTY: SALE OF COMPANY TO A THIRD PARTY  Sale of the business to a strategic buyer  All shares are sold to the third-party buyer, but management shareholders may be required to reinvest a DESCRIPTION significant portion of their proceeds back into the company ▲ Financial and strategic buyers have ample cash for acquisition ▲ Provides immediate cash to selling shareholders BENEFITS ▲ Ideal if long-term business growth prospects are questionable ▲ Provides access to additional capital and strategic resources to fund growth and for current opportunities ▼ Loss of ownership and control of the company ▼ Sell-side process can disrupt management ▼ Extensive third-party due diligence process CONSIDERATIONS ▼ Requires sharing confidential information with third parties ▼ To attract buyers, the company will require a sell-side M&A process, which typically takes 6-9 months page 8

STATUS QUO  Take no action and maintain the status quo DESCRIPTION ▲ Requires no action BENEFITS ▼ Company will pass to heir with full tax consequences ▼ Potential negative effects for employees CONSIDERATIONS page 9

THOUGHTFUL GUIDANCE If you have questions about how to transition ownership in your company, Chartwell can help. Chartwell offers financial advice to companies exploring ownership alternatives. Our professionals will work with you and your other advisors to understand the unique challenges of your situation and are experts at providing innovative solutions to optimize stakeholder outcomes. With over 20 years of experience in planning and transition execution, our advisors can guide your company into the next chapter of its ownership. Chartwell provides strategic advisory, corporate finance, transaction, and valuation services for all different exit strategies, having completed over 400 valuations annually. Today, our dedicated Architecture, Engineering, and Consulting (AEC) team provides annual advisory services to more than 50 companies in the industry. Contact Chartwell to help with your company’s ownership transition. CONTACT CHRISTOPHER M. STALOCH, ASA | Managing Director, AEC practice leader | chris.staloch@chartwellfa.com CHARTWELL page 10