Story Agenda Exit Planning Collaboration Financial Planners - - PDF document

The Exit Planning Executive Briefing

Presented by Geoffrey S. Gallo, ChFC, CExP TR Moore & Company, PC

Member of Business Enterprise Institute’s Network Of Exit Planning Professionals™

Story

Agenda

• Exit Planning Collaboration – Financial Planners &

TR Moore & Company

• Overview of TR Moore & Company and our unique

approach

• Outline The Seven Step Exit Planning Process™.
• Illustrate what you can be doing now to help your

clients exit in style.

• Next Steps together

About TR Moore & Company

• Hindsight is not a performance strategy!
• Much more than a historical financial perspective,

we play an integral role in our clients’ goals and dreams, helping them understand the state of their business and to more effectively manage it, while introducing opportunities for growth and wealth.

• Said simply, we promise our clients Insight,

Oversight and Foresight, while other firms continue to provide rearview-mirror hindsight.

About TR Moore & Company

• Founded 1984

– Top 25 Firm – “Inside Public Accounting” Magazine

• Effective July, 12, 2010 – merged with Doeren Mayhew of

Troy, MI (Top 80 US CPA firm)

• Provide business management, tax and accounting solutions

to more than 200 companies

• Industries represented among our clients include

manufacturing, energy, construction, service, transportation, real estate, wholesale and retail

• 45-person team in Houston, supported by 250 professionals in MI

with international, national and regional business experience

Affiliations – International Resources

• One of the world's major accounting and consulting

networks with 351 independent firms and 630 offices in 98 countries.

• Moore Stephens International maintains a

cohesive network to ensure modern and comprehensive global services that meet standards of professionalism and deliver value in each country

MOORE STEPHENS INTERNATIONAL

Question: Which business would you buy?

Company A Example:

• EBITDA grows to $1 million.

– Owner runs the business, systems and processes to create growth.

• No real management team in place.

– Sales are generated by owner.

• Owner is both CEO and CFO.

Company B Example:

• EBITDA grows to $1 million.

– Management team runs the business, systems and processes. – Management team creates efficiencies within the business.

• Owner vacations four months a year.

Why Exit Planning?

• How much more would you pay for a business

with Value Drivers, such as a strong management team, in place?

• “Without a strong management team in place,

sellers reduce their buyer market by at least 85%.”

– Kevin Short, Managing Partner, Clayton Capital Partners (Investment Bankers)

• “Without a strong management team in place,

sellers can’t sell to insiders – period.”

– John H. Brown, President, Business Enterprise Institute, Inc.

Planning to Maximize Goals

Why don’t owners plan an orderly exit to maximize goals?

• No plan to leave the business.

– Owners don’t think of starting to plan to leave their businesses until “Thursday.”

• Don’t know what to do.
• “I’m too busy.”

– If too busy to develop and implement a plan to grow, protect and preserve business value, and to develop and implement a plan to convert your life’s work into cash – – You will end up exiting on Friday disappointed.

Planning to Maximize Goals

• How long does it take an owner to plan and

implement a plan to leave the business?

• It depends on:

– Owner’s Exit Objectives (what he or she wants) – Owner’s Personal and Financial Resources (what he or she has)

Planning to Maximize Goals

Case #1

• Exit Objectives:

– Exit in two years with $500k annual income.

• Sell the business to a third party
• Personal and Financial

Resources:

– Business valued at $10 million. – A strong management team exists. – Focus on growing value of the business through Value Drivers. – The M & A cycle is peaking. – Owner has $3 million in non- business investments

Case #2

• Exit Objectives:

– Exit in two years with $500K annual income.

• Sell the business to anyone
• Personal and Financial

Resources: – Business valued at $3 million. – No management team exists. – Cash flow is relatively flat. – Owner has little in non- business investments

Why Exit Planning?

Exit Planning focuses value/business efforts on value that is convertible, into money.

Why Exit Planning?

How Do You Get Started?

• Determine where the owner is now, in relation to

his or her Exit Objectives and Personal and Financial Resources.

• Create a plan based on what needs to be done to

achieve the stated goals.

– This gives a good sense of how long the planning and implementation will take.

• Implement the planning recommendations.

My Client Representation Process

Ingredients of a Successful Exit

• A written Exit Plan based on your objectives.
• An experienced team of advisors to design and

implement the plan.

• Cash flow and a quantified business value.
• A strong management team in place.
• Time

The Seven Step Exit Planning Process™

Step 1 – Identify Exit Objectives Step 2 – Quantify Business and Personal Financial Resources Step 3 – Maximize and Protect Business Value Step 4 – Ownership Transfer to Third Parties Step 5 – Ownership Transfer to Insiders Step 6 – Business Continuity Step 7 – Personal Wealth and Estate Planning

“When a man does not know which harbor he is heading for, no wind is the right wind.”

• Seneca

Step 1: Identify Exit Objectives

Assessment Tools

• Exit Planning:
• 1. Owner Objectives & Financial Resources
• 2. Maximizing Business Value
• 3. Ownership Transfer
• 4. Business Continuity & Estate Planning
• Turbulent Times:
• 1. Strategic Objectives
• 2. Maximizing & Projecting Cash Flow
• 3. Preserving & Protecting Value
• 4. Creating & Maximizing Business Value

Assessment Tools

Assessment Tools

Step 1: Identify Exit Objectives

Universal Objectives

• How much longer do you want to work in the

business before retiring or moving on? ________ years

• What annual after-tax income do you want during

retirement (in today’s dollars)? $________

• To whom do you want to transfer the business?

– Family? – Co-Owner? – Key Employee(s)? – Outside party? – ESOP?

Step 1: Identify Exit Objectives

Assembling a Team of Advisors

• Who is on the team?
• Why is a team necessary?
• How do team members work to minimize fees and

costs?

Step 1: Identify Exit Objectives Role of the Insurance/Financial Advisor

• Suggest appropriate type of valuation and explain

high vs. low value objectives.

• Participate in selection of client’s valuation advisor

depending on owner's objective.

• Discuss methods of reducing business value (e.g.,

Unfunded Non-Qualified Deferred Compensation Plan).

• Opportunities:

– Develop Advisory Team relationship with owner's CPA and other professionals. – Create expectation of continuous involvement as a result of meaningful input during initial meetings.

“Beauty is in the eye of the buyer.” Step 2: Quantify Business & Financial Resources

Determining Value

Too many business owners don’t plan, or plan without a clear understanding of the company’s value or its value drivers. The Result = Minimized Sales Price Upon Exit TR Moore & Company helps business owners calculate the estimated value of their businesses and identify

• pportunities to increase that value prior to exit.

The Goal = Maximized Sales Price Upon Exit

Determining Value

Building Value

Sufficient Proceeds for Owner/Family ? Determine After‐Tax Proceeds From Sales at Current Value Estimate No Yes

Focus on Building Business Value Marketing the Business for Sale

Business Value

Do owners who transfer their business to “insiders” want to receive maximum value or minimum value for their

• wnership interests?

Business Value

That’s right... Minimum Value

Case Study: Golf Unlimited, Inc.

Sale of Business for Maximum Value

Fair Market Value = $1,000,000 Cash Flow = $1,700,000 Buyer Available Cash Flow $1,700,000 Income Tax Payment - $700,000 Total for Purchase $1,000,000 Seller Buyer’s Purchase $1,000,000 Capital Gains Tax - $200,000 Payment for Business $800,000

Case Study: Golf Unlimited, Inc.

Sale of Business for Minimum Value

Seller $300,000 Cash Flow $835,000 Capital Gains Tax - $60,000 Income Tax -$275,000 Payment for Business $800,000

Fair Market Value = $300,000

Buyer Cash Flow $450,000 Income Tax - $150,000 $300,000

Case Study: Golf Unlimited, Inc.

How Valuation Methods Impact Cash Needs

MAXIMIZE Value Sale for $1,000,000 Required Cash Flow $1,700,000 MINIMIZE Value Sale for $300,000 Required Cash Flow $450,000 Deductible Cash from Biz $835,000 Total Cash Flow Needed $1,285,000

Step 2: Quantify Business & Financial Resources Role of the Insurance/Financial Advisor

• Explain appropriate type of valuation.
• Help select valuation advisor depending on
• wner's objective (sale to third party or transfer to

insider).

• Discuss methods of reducing business value (e.g.,

Unfunded Non-Qualified Deferred Compensation Plan).

• Opportunity:

– Create Preliminary Exit Plan based on first two Steps (for a fee $5,000 - $10,000).

“Making a silk purse from a sow’s ear.”

Step 3: Maximize & Protect Business Value

Step 3: Maximize & Protect Business Value

Benefits to the Owner

• Grow business value and intangible value of the

business.

• Reduce income taxes upon sale of business.
• Protect assets from potential business and

personal creditors.

• Create ability to sell the business.
• Motivate and keep Key Employees.

Step 3: Maximize & Protect Business Value

Promote Value Through Value Drivers

• Focus on increasing cash flow.
• Develop operating systems that improve

sustainability of cash flows.

• Document sustainability of earnings.
• Improve company performance as measured by

industry metrics.

• Pay down debt.

Step 3: Maximize & Protect Business Value

Promote Value Through Value Drivers

• Restructure organization.
• Solidify and diversify customer base.
• Implement strategies to grow the company.
• Develop and protect proprietary technology.
• Build a solid management team and groom a

successor. Possible Recommendations

• Key Employee Incentive Compensation Plan

– Stock Bonus Plan – Phantom Stock Plan – Stock Appreciation Rights Plan – Non Qualified Deferred Compensation Plan – Cash Bonus Plan

• Management Team Development Plan
• Employee Compensation Review and Analysis
• Qualified Retirement Plan Changes and Features
• Separation of Business Assets from Business

Operations

• Covenant Not to Compete and Other Protections

Step 3: Maximize & Protect Business Value

Role of the Insurance/Financial Advisor

• Recommend insurance to protect against loss of

business value.

• Educate owner about key employee

retention/motivation techniques.

• Opportunities:

– Fund Key Person Insurance through Non-Qualified Deferred Compensation plan. – Design and implement retirement plan. – Fund Non-Qualified Employee benefits. – Fund Non-Qualified Deferred Compensation.

Step 3: Maximize & Protect Business Value

“Making a mountain out of a molehill.”

Step 4: Ownership Transfer to Third Parties

• Preparation for the sale of a business to a third

party buyer and the completion of the transaction itself require focus, planning and stamina.

• Take steps to grow and protect value, even as

the owner starts the sale process.

Step 4: Ownership Transfer to Third Parties

Current M & A Marketplace

• 20 percent of businesses are for sale, but only one
• ut of four actually sells.
• Businesses with sales of $10 million per year aren’t

much better – only one-third sell.

• Above $10 million per year, the odds improve to 50-

50.

• The Perfect Storm is Coming – Demographics and

the Law of Supply & Demand

• 2005 Business Reference Guide by Tom West

Step 4: Ownership Transfer to Third Parties

Third-Party Sales – Not Just About the Business

• Ability to sell and business value are determined

by:

– Intrinsic Value: the value drivers. – Extrinsic Value: the value the market places on the business. – Effectiveness of the sale process.

Step 4: Ownership Transfer to Third Parties

Possible Recommendations

• Preparing the Company for Sale (Pre-Sale Due

Diligence)

• Reducing Company Debt Prior to Sale
• Pre-Sale Tax Planning
• Summary of Potential Buyers
• Stay Bonus for Employees
• Pre-Sale Planning for Business Real Estate
• Charitable Gifting
• Transferring Ownership to Children
• Transferring Ownership to Employees
• Re-valuing the Business

Step 4: Ownership Transfer to Third Parties

“Making a molehill out of a mountain.”

Step 5: Ownership Transfer to Insiders

Benefits to the Owner

• Achieves Exit objective of:

– Selling to Key Employee Group (KEG). – Transferring to a Child.

• Motivates and retains Key Employees.
• Planning reduces risk and increases amount of

money received.

Step 5: Ownership Transfer to Insiders

Owners must understand the need to minimize income tax consequences to buyer and seller by minimizing ownership value of business.

Step 5: Ownership Transfer to Insiders

Sale to a Third Party for Cash

Fair Market Value = $1,000,000 Annual Cash Flow = $250,000 Buyer Cash for purchase Seller $800,000 Net of Taxes

Timing: NOW

Step 5: Ownership Transfer to Insiders

Sale to Employee for Installment Note

Fair Market Value = $1,000,000 Cash Flow = $250,000 Employee Cash flow from business $250,000

• $150,000 (net of taxes)

Cash to Seller $120,000 (net of taxes) Owner $800,000 Net of Taxes

Timing: 7 – 9 years

Step 5: Ownership Transfer to Insiders

Cash Flow to Owner

Fair Market Value = $1,000,000 Cash Flow = $250,000 Owner Cash flow from business $250,000 ($150,000 net of taxes) to owner Seller/ Owner $800,000 Net of Taxes

Timing: 5 years

Step 5: Ownership Transfer to Insiders

Transfer to Employee: Phase I

Fair Market Value = $500,000 - $1,000,000 Cash Flow = $250,000 Seller $50,000 After Taxes $150,000 After 3 Years Employee 40% of Stock sold to Employee for $200,000 ($100,000 of cash flow per year to Employee) Seller $106,667 After Taxes $320,000 After 3 Years Owner Cash flow from business $150,000 per year

Step 5: Ownership Transfer to Insiders

Transfer to Employee: Phase II

Fair Market Value = $500,000 -$1,000,000 Cash Flow = $250,000

Timing: 3 years

Seller $480,000 Net of Taxes Employee 60% of Stock sold to Employee for $600,000 Total $950,000 After 3 Years

Step 5: Ownership Transfer to Insiders

Possible Recommendations

• Skills Development During Ownership Transition
• Sale of Partial Ownership Interest
• Bonus of Ownership Interest
• Gift of Ownership Interest
• Non-Qualified Deferred Compensation Plan
• Stock Option Plan
• Stock Bonus Plan
• GRAT (Grantor Retained Annuity Trust) and

Family Transfers

• IDGT (Intentionally Defective Grantor Trusts)

Step 5: Ownership Transfer to Insiders

Role of the Insurance/Financial Advisor

• Completion or update of the owner’s Financial

Needs Analysis to determine whether total after-tax value will be sufficient to meet

• bjectives.
• Evaluate and recommend funding strategies.
• Opportunities:

– Collect fees for Financial Needs Analysis. – Provide key person insurance to buyer. – Provide seller insurance funding in event of seller's or buyer's death.

Step 5: Ownership Transfer to Insiders

“Making sure the business continues when you don’t.”

Step 6: Business Continuity Planning

If the owner dies or becomes disabled, what happens to his or her business and family?

• Co-Owned Businesses:

– When was the buy-sell agreement last reviewed? Does the current agreement fully cover:

• Current Valuation
• Funding
• Coverage of all Transfer Events

Step 6: Business Continuity Planning

If the owner dies or becomes disabled, what happens to his or her business and family?

• Solely-Owned Businesses:

– Has the owner taken steps to make sure:

• The business will continue if the owner doesn’t?
• Key employees are handcuffed to the business?
• The business is adequately capitalized?

Step 6: Business Continuity Planning

Sole Owner Business Continuity The Solution:

• Communicate owner’s wishes regarding continuity in

writing.

• Post Death Decision Tree
• The Stay Bonus Plan

Step 6: Business Continuity Planning

The Stay Bonus and Salary Guarantee

• Provides for important employees to be compensated for their

time and for their commitment to continue working until the company is transferred or liquidated.

• Provides cash incentive for these employees to stay: “The

Stay Bonus.”

• A written, funded plan providing periodic bonuses (12–18

month time frame) for employees who remain with the company during transition.

• Bonus typically equals 50% of annual compensation.
• Salary guarantee typically equals100% of annual

compensation.

Step 6: Business Continuity Planning

Possible Recommendations

• Wage (Salary) Continuation Plan for Owners
• Stay Bonus Plan
• Business Continuity Guidelines
• Buy-Sell (Shareholder) Agreement
• Retaining Key Employees After Owner’s Death or

Disability

• Disposition of Ownership Interest Through Estate

Planning Documents

• Business Insurance for Continuity Planning

Step 6: Business Continuity Planning

Role of the Insurance/Financial Advisor

• Review continuity arrangements in light of Financial Needs

Analysis.

• To sole owner, explain need for continuity and Stay Bonus

Plan.

• If co-owner, discuss need for business continuity planning.
• Coordinate continuity planning with estate planning.
• Opportunities:

– Provide funding in case of owner's and co-owner’s death or disability. – Participate in design and funding of Buy-Sell arrangements. – Provide funding mechanism Stay Bonus Agreement. – Fund business capital needs for various contingencies.

Step 6: Business Continuity Planning

“When the ‘slings and arrows’ of outrageous fortune befall you, fight back.”

• William Shakespeare (Hamlet)

Step 7: Personal Wealth & Estate Planning

The Beginning …

Systematic & Accountability Process Next Steps

• We would love to work with you

– Strategic Alliance

• Success Fee participation

– Current Deal Mandates – 15%

Strategic Alliance Effort

Business Owner Workshops to help clients/prospects boost performance

– Intense – Interactive – Involve multiple disciplines – Curriculum based upon their needs and concerns

• Assessments

Sample Invitation

Strategic Alliance Effort

• Schedule a CEO workshop or Executive Briefing for

your clients/prospects– fee waived – Send E-mail invitation – Tell them to expect a call for 15-20 minute phone assessment – Click on Register Online at bottom of invitation – Send contact information to TR Moore – TR Moore will confirm two days before event; You do as well.

• Clients who need help now? We perform a

comprehensive evaluation for a fixed fee of $3,500 – satisfaction guaranteed – Fee is waived with your introduction

Additional Resources

Meet the Author

• John H. Brown
• President, Business Enterprise Institute, Inc.

The Exit Planning Executive Briefing

At some point, every owner leaves his or her business - voluntarily or otherwise. At that time, every owner wants to receive the maximum amount of money in order to accomplish personal, financial, income and estate planning goals.

Thank You

Geoffrey S. Gallo, ChFC, CExP TR Moore & Company, PC 713.789.7081 x 247 ggallo@trmoore.com