The Exit Planning Executive Briefing. Presented by Geoffrey S. Gallo, ChFC, CExP TR Moore & Company, PC

Transcription

1 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

2 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.

3 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 MOORE STEPHENS INTERNATIONAL 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

4 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.

5 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)

6 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 nonbusiness 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 nonbusiness investments Why Exit Planning? Exit Planning focuses value/business efforts on value that is convertible, into money.

7 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

8 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

9 Step 1: Identify Exit Objectives When a man does not know which harbor he is heading for, no wind is the right wind. - Seneca

10 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

11 Assessment Tools

12 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?

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

14 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 opportunities to increase that value prior to exit. The Goal = Maximized Sales Price Upon Exit Determining Value

15 Building Value Determine After Tax Proceeds From Sales at Current Value Estimate Sufficient Proceeds for Owner/Family? Yes No Marketing the Business for Sale Focus on Building Business Value Business Value Do owners who transfer their business to insiders want to receive maximum value or minimum value for their ownership interests?

16 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

17 Case Study: Golf Unlimited, Inc. Sale of Business for Minimum Value Fair Market Value = $300,000 Buyer Cash Flow $450,000 Income Tax - $150,000 $300,000 Seller $300,000 Cash Flow $835,000 Capital Gains Tax - $60,000 Income Tax -$275,000 Payment for Business $800,000 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

18 Step 2: Quantify Business & Financial Resources Role of the Insurance/Financial Advisor Explain appropriate type of valuation. Help select valuation advisor depending on owner'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). Step 3: Maximize & Protect Business Value Making a silk purse from a sow s ear.

19 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.

20 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. Step 3: Maximize & Protect Business Value 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

21 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 4: Ownership Transfer to Third Parties Making a mountain out of a molehill.

22 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 out 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 The Perfect Storm is Coming Demographics and the Law of Supply & Demand Business Reference Guide by Tom West

23 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

24 Step 5: Ownership Transfer to Insiders 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.

25 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

26 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

27 Step 5: Ownership Transfer to Insiders Transfer to Employee: Phase I Fair Market Value = $500,000 - $1,000,000 Cash Flow = $250,000 Employee 40% of Stock sold to Employee for $200,000 ($100,000 of cash flow per year to Employee) Owner Cash flow from business $150,000 per year Seller $50,000 After Taxes $150,000 After 3 Years Seller $106,667 After Taxes $320,000 After 3 Years Step 5: Ownership Transfer to Insiders Transfer to Employee: Phase II Fair Market Value = $500,000 -$1,000,000 Cash Flow = $250,000 Employee 60% of Stock sold to Employee for $600,000 Seller $480,000 Net of Taxes Total $950,000 After 3 Years Timing: 3 years

28 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 objectives. 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.

29 Step 6: Business Continuity Planning 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

30 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

31 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

32 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 7: Personal Wealth & Estate Planning When the slings and arrows of outrageous fortune befall you, fight back. - William Shakespeare (Hamlet)

33 The Beginning

34 Systematic & Accountability Process Next Steps We would love to work with you Strategic Alliance Success Fee participation Current Deal Mandates 15%

35 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

36 Strategic Alliance Effort Schedule a CEO workshop or Executive Briefing for your clients/prospects fee waived Send invitation Tell them to expect a call for 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.

37 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 x 247 ggallo@trmoore.com