Estate Planning Council of San Gabriel Valley

Transcription

1 Estate Planning Council of San Gabriel Valley Business Succession Planning Richard C. Watson, Esq, LLM (tax), MSFS, CFP, ChFC, CLU, EA Attorney at Law (949)

2 The Business Owner Segment SECTION TITLE GOES HERE

3 Business Owner Segment HNW/UHNW Business Owners Business Owners Facing a Liquidity Event Business owner subject to liquidity events, especially sales to employees (i.e., leveraged and managed buyouts), sales to ESOPs, and sales to financial/strategic buyers Average liquidity size = $3.54mm Sources: VIP Forum, HNW Asset Allocation and Altitudinal Trends by Wealth Segment, October 2012; Federal Reserve Board s 2010 Survey of Consumer Finances Source: VIP Forum, What You Should Know: The Business Owner Segment,

4 Typical Business Owner Profile 52% 44% 33% 32% 31% Named Friend or Family Member to Administer Estate Set-up a Trust for Some or All of Household Assets Created a Business Succession Plan Developed a Comprehensive Financial Plan with a Professional, including Wealth Transfer Named a Professional Trustee Source: 2012 PNC Business Owners Survey 4

5 Family Ownership Continuity Percentage of family firms surviving future generation... 1 st Generation 100% 2 nd Generation 30% 3 rd Generation 12% 4 th Generation 3% Regardless of generation in question a family owned company has roughly a 1 in 3 chance of ownership succession. 5

6 The Business Owner Segment Cont. Did you see the moonwalking bear? It s easy to miss what your not looking for! Business owners are o Majority of HNW individuals o A big rock--trillion shifting hands over the next ten years o Unplanned o Largely untapped 6

7 SECTION TITLE GOES HERE Business Succession Planning Process

8 Process Leads to Better Planning Outcomes We believe that the business succession process can help maximize the value of the business and increase the probability of a successful transition or closing 8

9 Business Transition Options Business Owner Family Charitable Key Employees Co-Owners External Buyer (retire) External Buyer (continue) Public Markets Transfer Methods Outright Gift SCIN Private Annuity FLP GRAT IDGT CRAT CRUT CLAT CLUT Private Foundation MBO ESOP Synthetic Equity Exec Comp Planning Alternatives Cross Purchase Entity Redemption Hybrid Buy-Sell Agreement Strategic Sale Auction vs. Negotiated Sale Process Majority or Partial Sale to a Financial Partner Debt /Equity Recap IPO DPO Reverse Merger Going Private 9

10 SECTION TITLE GOES HERE Shareholder Rights in California

11 Shareholder Rights General Categories of Shareholder Rights The right to receive information about the corporation; Annual report; annual financial statements, quarterly financial information; shareholder lists and record; books and records; minute books, inspect bylaws; results of shareholder votes The right to participate in corporate management; Shareholder meetings; annual meeting; special meetings; voting Ownership rights in the corporation; Property rights; dissenter s rights The right to bring suit. Individual versus derivative. 11

12 Majority Shareholder Fiduciary Duties Majority shareholders must use their power to control the corporation for the benefit of all shareholders proportionately and for proper conduct of the corporation's business; they may not use that control to benefit themselves alone or to destroy the minority's interest. Smith v Tele-Communication; Crain v Electronic Memories & Magnetics Corp In particular, when making any sale or transfer of a controlling block of shares, majority or controlling shareholders have a clear fiduciary obligation to act in good faith and with inherent fairness toward minority shareholders. Jones v H. F. Ahmanson & Co; DeBaun v First W. Bank & Trust Co 12

13 Business Transition Options Business Owner Family Charitable Key Employees Co-Owners External Buyer (retire) External Buyer (continue) Public Markets Transfer Methods Outright Gift SCIN Private Annuity FLP GRAT IDGT CRAT CRUT CLAT CLUT Private Foundation MBO ESOP Synthetic Equity Exec Comp Planning Alternatives Cross Purchase Entity Redemption Hybrid Buy-Sell Agreement Strategic Sale Auction vs. Negotiated Sale Process Majority or Partial Sale to a Financial Partner Debt /Equity Recap IPO DPO Reverse Merger Going Private 13

14 SECTION TITLE GOES HERE Types of Equity Alternative Plans

15 Types of Equity Alternative Plans What is phantom stock? Phantom stock = an award paid for the value of a defined number of shares. Not usually paid in actual shares, but in the form of a promise to pay the value of the shares at some point in the future (i.e., after a specified number of years of employment). Usually paid in cash, but could be paid in shares. Other terms occasionally used to describe the concept: Share value awards, equity rights awards, unit awards 15

16 Types of Equity Alternative Plans What is restricted stock (or RSUs)? Restricted stock = a sale or grant of shares subject to restrictions. Usually a grant of or an option/right to buy shares, but the employee would not take possession of them until a later time when certain requirements have been met (i.e., restrictions have been lifted for example, time based restrictions, company reaching a certain size). Can be eligible for any dividends paid on the shares and could be allowed to vote them. Shares are forfeit, if terms of restrictions not fulfilled. 16

17 Types of Equity Alternative Plans What is a SAR? A SAR is like a stock option without stock: It generally can be exercised freely at a point after vesting (or upon the occurrence of a specified event) and before the end of its term. At exercise, the company pays the executive the amount that the share price has appreciated between the award date and the exercise date, multiplied by the number of shares specified in the award. The payout can be made in cash or in shares of stock. Example of SARs As part of a retention strategy for select key employees, Board decides to award Executive 1,000 SAR units with a three year cliff vesting schedule, or upon a change of control of the company, as defined in the plan document. On the date of award, the fair market value of the underlying stock is $100 per share. Executive remains with the company for three years, and his SAR units vest. The company experiences a change of control event thereafter. The fair market value of the company s underlying stock at that time is $125 per share. As a result of the SARs plan, Executive receives $25,000 in additional compensation (1,000 SAR units x the appreciation value of $25 per unit [$125 stock value on the date of exercise - $100 stock value on the date of award = $25 per unit]) 17

18 Ideas for Metrics for Performance Based Vesting Performance Based Vesting Ideas Metrics External metrics Internal financial metrics Operational metrics Group, team, and project metrics Individual metrics Absolute total return; share price Examples Revenue; return on invested capital (ROIC); earnings before interest, taxes, depreciation, and amortization (EBITDA); earnings per share Production volumes; delivery timing Departmental year-over-year customer satisfaction; delivery of a new service offering or product line; government or regulatory approval (i.e., FDA approval) Performance appraisal; sales goals; project or task success factors 18

19 Summary of Equity Alternative Plans Equity Based Incentive Effect on Employer Cash Flow Dilution Employer s Tax Deduction Employee s Tax Consequences Restricted Stock None Additional stock issued or treasury shares are transferred to employee When restrictions lapse Deduction equal to value of stock when restrictions lapse or when employee elects to recognize income under IRC Sec. 83(b) Ordinary income when restrictions lapse or Section 83(b) election made If 83(b) election made and executive fails to meet restrictions, no offsetting deduction Stock Appreciation Rights Value of SAR paid cash or stock Can be paid lump sum or in installments If paid in stock Compensation deduction in year of transfer equal to cash or value of stock transferred Ordinary income equal to cash or stock received Phantom Stock Value of stock at fixed date is paid in either cash or stock Can be paid lump sum, installments, or deferred until future date If paid in stock Compensation deduction in year of transfer equal to cash or value of stock transferred Ordinary income equal to cash or stock received 19

20 SECTION TITLE GOES HERE Thoughts on Other Key Employee Matters

21 Counterproductive Rewards Arrange to retain key employees for a specified period after the transition or sale. 21

22 Non-Compete Agreements 22

23 Non-Compete Agreements Cont. Business owners. Business & Professional Code Sec Members of limited liability companies. Business & Professional Code Sec Partners in partnerships. Business & Professional Code Secs and

24 Nonsolicitation of Employees and Customers Nonsolicitation of costumers using company s trade secrets. Edwards versus Arthur Anderson. Exception to Business & Professional Code Sec.16600? Nonsolicitation of employees. Loral Corp versus Moyes. Confidentiality and proprietary rights agreements California has adopted the California Uniform Trade Secrets Act (Civil Code Secs to ), often referred to as the CUTSA to distinguish it from the model Uniform Trade Secrets Act (UTSA). 24

25 Practical Considerations Timing of payments Have nonsolicitation and confidentiality agreements Avoid vague or undocumented promises Awareness of non-family management potential issues in family businesses: Non-family concerns about career development opportunities and long-term job security Family member reports to a non-family family member Resentment of privileged treatment Family business dynamics Have a strong management bench 25

26 SECTION TITLE GOES HERE MBO Structured as a Stock Redemption

27 Business Transition Options Business Owner Family Charitable Key Employees Co-Owners External Buyer (retire) External Buyer (continue) Public Markets Transfer Methods Outright Gift SCIN Private Annuity FLP GRAT IDGT CRAT CRUT CLAT CLUT Private Foundation MBO ESOP Synthetic Equity Exec Comp Planning Alternatives Cross Purchase Entity Redemption Hybrid Buy-Sell Agreement Strategic Sale Auction vs. Negotiated Sale Process Majority or Partial Sale to a Financial Partner Debt /Equity Recap IPO DPO Reverse Merger Going Private 27

28 Case Study 1: MBO structured as a Stock Redemption The MBO/Stock Redemption Scenario Business owner owns a C corp worth approximately $10M, in the manufacturing space, and would like to slow down and begin focusing on retirement. He s received several unsolicited offers from potential third party buyers over the years, but they have never panned out for a variety of reasons. He would like to sell the company to a key employee, but, while the key employee has managed to save some resources ($1M) for a potential down payment, he does not have sufficient resources for an outright sale (i.e., $10M in liquidity). The business owner and the buyer decide to structure the sale as a stock redemption. 28

29 Overview of the Strategy A MBO structured as stock redemption usually consists of three steps: The buyer is bonused stock by the company (i.e., if he or she is an employee) or gifted or sold a percentage of outstanding stock by the owner. This represents the buyer s equity contribution to the deal and often ranges from 10% 20% of the company s value. A lender loans the remainder of the purchase price to the company. With the newly borrowed funds, the company redeems the owner s interest in the company, leaving the buyer as the sole owner of the business. 29

30 MBO Structured as a Stock Redemption Step one: The owner sells 10% of his or her outstanding stock to the buyer. Owner Owner sells 10% of shares for $1M Buyer 30

31 MBO Structured as a Stock Redemption Step two: A lender loans $3M to the company.. Lender $3M in new senior debt Company 31

32 MBO Structured as a Stock Redemption Step three: With the newly borrowed funds, the company redeems the owner s remainder interest in the company, in return for a down payment (of $3M) and a promissory note (of $6M). Redeems remainder of shares Owner $3M cash (down payment) and $6M promissory note Company 32

33 MBO Structured as a Stock Redemption Leaving the buyer as the sole owner of the company post-transaction. Buyer Buyer owns 100% of company Company 33

34 Valuation Standard of value: No specific standard of value need be used for unrelated parties. The purchase price may be negotiated by the parties. Unrelated parties may also have the company appraised by an objective, independent appraiser. Related parties should consider having the company appraised in order to avoid a deemed gift. Practical considerations regarding valuation: Who should pay for the appraisal? The bank may require an appraisal, especially for a SBA product Will the stock being sold be discounted because of restrictions in any way? What pre-sale planning is being considered by the seller (i.e., GRAT, IDGT, CLAT/CRT)? 34

35 Funding the Transaction Buyer s private sources Bank financing Machinery and equipment financing Leasing Term loans Mezzanine financing SBA loans Private equity (as opposed to a private equity recap) Company assets (i.e., building, equipment) (though note IRC Sec. 311(b) in a corp context) Seller note 35

36 Funding the Transaction What are the company s other financing needs posttransaction? Existing debt Working capital lines CAPEX Other practical considerations regarding financing: Understanding the company s cash flows through varying operating results Loan covenant compliance Personal guarantees Seller subordination 36

37 Seller s Tax Consequences Sale or exchange treatment: LTCG is taxed at a preferential rate (20%) Stock basis offsets sales proceeds IRC Sec. 302(b) criteria A substantial reduction in the owner s interest (at least a 20% reduction and less than 50% ownership after the transaction) under IRC Sec. 302(b)(2); Or a complete termination of the owner s interest under IRC 302(b)(3) Family attribution (constructive ownership) under IRC Sec. 318 (spouse, parent, child, grandchild) Caution with post-transaction consulting or non-compete payments Distribution (potential dividend treatment): Full amount is taxable (i.e., no basis offset) 37

38 Buyer s Tax Consequences Buyer takes a tax basis in the acquired stock equal to his or her purchase price. The tax basis of the company s assets is not adjusted. An IRC Sec. 338 election to step up the asset basis is not available, because a corporation did not acquire at least 80% of the company s stock. 38

39 Other Legal Considerations Retained earnings, the balance sheet, insolvency, and other tests in Corp Code Secs Fairness opinion under Corp Code Sec. 1203(a). Corp Code Sec. 1203(a)(5) contains exemptions for a target corporation with fewer than 100 shareholders and for a transaction qualified by a permit issued by the Commissioner of Business Oversight under Corp Code Sec or Because a bulk sale is defined to apply to a sale of more than half of a seller's inventory and equipment, measured by value (Commercial Code Sec. 6102(a)(3)(ii)), the sale of an entire business (including inventory assets) is considered a bulk sale. There are exemptions from the bulk sales law. Commercial Code Sec. 6103(c). 39

40 Practical Considerations All liabilities remain with the company, through transaction may still require consents from a lender if there is existing debt Requires a strong management bench Consideration may include a deferred compensation arrangement and/or consulting agreement May require collateral agreements, such as an employment contract, a shareholder s agreement (if there is more than one buyer or if the owner is only doing a partial sale), restating the bylaws, etc. 40

41 SECTION TITLE GOES HERE Purchase Using a Holding Company

42 Case Study 2: Purchase Using a Holding Company The Holding Company Scenario Business owner owns a C corp worth approximately $10M, in the manufacturing space, and would like to slow down and begin focusing on retirement. He s received several unsolicited offers from potential third party buyers over the years, but they have never panned out for a variety of reasons. He would like to sell the company to a key employee, but, while the key employee has managed to save some resources ($1M) for a potential down payment, he does not have sufficient resources for an outright sale (i.e., $10M in liquidity). The business owner and the buyer decide to structure the sale via a newly created holding company, owned by the buyer. 42

43 Overview of the Strategy A MBO structured as stock purchase, using a holding company, consists of several steps: Buyer contributes cash (generally equal to 10-20% of the purchase price) to a newly-formed holding company in exchange for that company s stock (an IRC Sec. 351 incorporation). The holding company borrows the remainder of the purchase price from a lender. The holding company uses the borrowed funds and the equity capital to purchase the owner s stock. The result is that the buyer owns 100% of the stock in a holding company that owns the stock of the acquired company. 43

44 Purchase Using a Holding Company Step one: Buyer contributes cash (generally equal to 10-20% of the purchase price) to a newlyformed holding company, in exchange for that company s stock. This incorporation can be completed tax-free, under IRC Sec Buyer $1M cash contribution Holding Company 44

45 Purchase Using a Holding Company Step two: A lender loans $3M to the holding company.. Lender $3M in new senior debt Holding Company 45

46 Purchase Using a Holding Company Step three: The holding company uses the borrowed funds ($3M) and the equity capital ($1M) to purchase the owner s stock. Owner Owner sells all outstanding shares $4M down payment + $6M promissory note Holding Company 46

47 Purchase Using a Holding Company The result is that the buyer owns 100% of the stock in a holding company that owns the stock of the acquired company. The company remains intact and business liabilities are transferred to the buyer. Buyer Holding Company Company 47

48 Seller s Tax Consequences LTCG is taxed at a preferential rate (20%). Installment reporting for seller financing. IRC Sec. 302 does not apply. 48

49 Buyer s Tax Consequences Generally more complex and expensive than a singleentity transaction Two corporate entities must be maintained, with at least the basic corporate formalities observed. Holding company usually has little or no assets other than the acquired stock and all of the acquisition debt. Consolidated federal tax return filed to allow the holding company s interest expense to offset the acquired company s operating income. 49

50 Variation with a IRC Sec. 338 Election IRC Sec. 338 treats certain stock purchases as asset purchases. Selling shareholders treated as selling stock (i.e., subject to cap gains). Acquired company treated as if it sold its assets to the purchaser (i.e., reports gain as if all its assets had been sold, which results in their being stepped up to FMV). The holding company controls the acquired company and is liable for the tax on the corporate-level gain, but also reaps the benefit of the stepped-up basis. 80% or more of the company s stock must be acquired by another company in a stock purchase. 50

51 Variation Structured as an Asset Purchase A portion of the sales price is allocated to each asset sold (IRC Sec. 1060). The character of the gain or loss on the sale of each asset (e.g., capital, Sec. 1231, or ordinary) depends on the character of the asset sold. After winding up any other business and paying tax on the asset sale, the company is usually liquidated. If the company is a C corp, this results in double tax to the owner. If the company is a partnership or S corp, the gain on the asset sale is generally taxed only once, since the gain increases the owner s basis in the entity. 51

52 SECTION TITLE GOES HERE MBO structured as a Cash Merger

53 Case Study 3: MBO Structured as a Cash Merger The Cash Merger Scenario John owns 100% of the stock of Oldco, Inc., which is worth approximately $1M. he decides to sell his stock to a group of employees in a MBO. The buyout group consisting of four members, including John s daughter, Jane. The buyout group forms a corporation, Newco, by contributing $125,000 each (total equity $500,000) in exchange for Newco s common stock. Oldco will be merged into Newco. John s merger consideration will consist of $1M cash ($500K in equity capital + $500K borrowed by Newco). 53

54 Overview of the Strategy A MBO structured as cash merger consists of the following steps: Buyer contributes cash to a newly formed corporation (Newco), in exchange for that company s stock (IRC Sec. 351 incorporation). Lenders loan the remainder of the purchase price to Newco. The acquired company is merged into Newco. 54

55 MBO Structured as a Cash Merger Step one: The buyout group contributes $500K to Newco, in exchange for that Newco s stock. This incorporation can be completed tax-free, under IRC Sec Buyout Group $500K cash Newco 55

56 MBO Structured as a Cash Merger Step two: A lender loans $500K to Newco.. Lender $500K loan Newco 56

57 MBO Structured as a Cash Merger Step three: Oldco is merged into Newco. John receives $1M as merger consideration. Oldco By operation of law, Newco becomes the owner of all Oldco s assets and assumes all liabilities. John $1M Newco After the transaction, the buyout group owns 100% of Newco. Buyout Group 57

58 Seller s Tax Consequences John is treated as having exchanged his Oldco stock for Newco stock in a tax-free reorganization. Considered to have received $1M as a stock redemption of Newco stock. The redemption proceeds are tested under IRC Sec. 302 to determine whether they qualify for sale or exchange (rather than dividend) treatment. John s ownership in Newco immediately before he receives the $1M merger consideration is 67% ($1M value of John s contribution to Newco $1.5 million total equity contributions to Newco). Immediately after the redemption, he owns no Newco stock directly, but is attributed 25% ownership due to his daughter Jane s 25% ($125,000 equity contribution $500,000 total equity). John s ownership after the redemption is only 37% (25 67) of his pre-redemption ownership percentage. Because John s post-redemption ownership percentage is less than 80% of his pre-redemption percentage, and he also owns less than 50% of Newco after the redemption, the $1M redemption proceeds receive sale or exchange treatment under IRC Sec. 302(b)(2). 58

59 Buyer s Tax Consequences Treated as if the newly formed company (Newco) acquired all of the acquired company s assets in a taxable purchase (Rev. Rul. 69-6). Because Newco assumes all the acquired business liabilities in the merger, the buyout group inherits the liability for the tax on the asset sale. 59

60 SECTION TITLE GOES HERE Dealing with Minority Shareholders

61 Reverse Cash Merger Buyout group contributes cash to a newly formed corporation (Newco) in exchange for its stock in an IRC Sec. 351 transfer. Lenders loan the remainder of the purchase price to Newco, or to the acquired business. Newco is merged into the business to be acquired. By operation of law, Newco ceases to exist. The merger agreement provides that Newco s shareholders (the buyout group) receive stock in the acquired company. The existing owners of the acquired company receive cash and often, other consideration, such as notes receivable from the corporation. When the transaction is complete, the buyout group owns all the stock in the acquired corporation 61

62 Reverse Subsidiary Merger The buyout group contributes cash to a newly formed holding company in exchange for that company s stock (an IRC Sec. 351 incorporation). Lenders loan the remainder of the purchase price to the holding company. Holding company forms a subsidiary in a tax-free (i.e., IRC Sec. 351) transaction. Subsidiary is merged into the acquired business. The subsidiary s shareholder (holding company) receives stock in the acquired corporation and the acquired corporation s existing shareholders receive cash or other assets in the merger. 62

63 SECTION TITLE GOES HERE Sale to an Employee Stock Ownership Plan (ESOP)

64 Business Transition Options Business Owner Family Charitable Key Employees Co-Owners External Buyer (retire) External Buyer (continue) Public Markets Transfer Methods Outright Gift SCIN Private Annuity FLP GRAT IDGT CRAT CRUT CLAT CLUT Private Foundation MBO ESOP Synthetic Equity Exec Comp Planning Alternatives Cross Purchase Entity Redemption Hybrid Buy-Sell Agreement Strategic Sale Auction vs. Negotiated Sale Process Majority or Partial Sale to a Financial Partner Debt /Equity Recap IPO DPO Reverse Merger Going Private 64

65 Case Study 4: Tax-Deferred Sale to an ESOP The ESOP Scenario XYZ, a C corporation worth approx. $12M, was founded by Mike Jones, who is president, and the controlling shareholder. The company has several other senior officers who hold modest amounts of ownership. XYZ was founded by in 1985 and has enjoyed a steady progression of successful operations. The company provides proprietary software and system support to the technology industry. Mike would like to slow down, take some chips off of the table ($5M), and is motivated to benefit employees. 65

66 Overview of the Strategy What is an ESOP? An ESOP is a special type of qualified retirement plan established for the benefit of employees. Invests primarily in the employer s stock. May borrow in order to buy the stock, and the debt is paid out of the employer s contributions to the ESOP. Requirements for tax deferral: Domestic C corporation (at the time of the sale) Held for 3-yrs. IRC Sec. 1042(b)(4) ESOP must own 30% of each class of outstanding stock (or 30% of the total value, immediately after the sale. IRC Sec. 1042(b)(2) Stock must not have been acquired in a distribution from a qualified retirement plan or from an option or right to acquire stock IRC Sec only applies to LTCG stock. IRC Sec. 1042(a) 66

67 Qualified Replacement Property (QRP) Definition Meaning is set forth in IRC Sec. 165(g)(2). IRC Sec. 1042(c)(4)(D) QRP Requirements Must be issued by a domestic operating corporation: o > 50% of its assets must be used in an active trade or business during the replacement period. IRC Sec. 1042(c)(4)(B)(i) o May not have passive investment income > 25% of gross income over its preceding year (passive income = IRC Sec income). QRP must be purchased, not acquired by gift, inheritance, or as a stock dividend. IRC Sec. 1042(c)(4)(A) 67

68 Qualified Replacement Property (QRP) Stocks Bonds QRP Includes QRP Does NOT Include Certificates of deposit (PLR ) Securities issues by government or political entities Debentures Mutual funds (PLR ) Notes, including floating rate notes (FRNs) Rights to subscribe for/to receive stock in a corporation Stock in a brother-sister control group (i.e., IRC Sec. 1563(a)(2) companies) Real estate investment company (active) (PLR ) Stock in any parent-subsidiary control group members (i.e., IRC Sec. 1563(a)(1) companies) Real estate investment company (passive) 68

69 Deal Structure Sale to an ESOP As an initial step in the ESOP sale process, XYZ would typically form a new ESOP trust and name an internal or external (corporate) fiduciary. However, assuming Mike would like to sell his 30% interest to the newly created ESOP trust, where will the funding for the stock purchase come from? Stock Sale Mike XYZ, Inc 69

70 Deal Structure Sale to an ESOP Based on XYZ s debt service capacity and collateral base, a bank lends XYZ $5mm. This is often referred to as the outside loan in an ESOP transaction. Lender $5M Outside loan XYZ, Inc. $5M Inside Loan ESOP 70

71 Deal Structure Sale to an ESOP XYZ would then loan the $5mm proceeds to the newly created ESOP, taking back a 15-year note from the ESOP. The note is referred to as the inside loan and often has a different amortization schedule, so that future employees can participate in the ESOP. Lender $5M Outside loan Repayment Company $5M Inside Loan Note ESOP 71

72 Loan Repayment Lender Outside loan repayment XYZ, Inc. Tax deductible contributions & dividends Inside loan repayment ESOP 72

73 Deal Structure Sale to an ESOP Since the ESOP trust would now have the funding to purchase his shares, Mike would sell his 30% interest in XYZ for $5mm. Lender $5M Outside loan Repayment XYZ, Inc. $5M Inside Loan Note Mike Stock sale $5M ESOP 73

74 Qualified Replacement Property (QRP) Mike Stock sale $5M ESOP Invests in QRP Tax-Deferred Sale QRP 74

75 Employee Participants Lender $5M Outside loan Repayment XYZ, Inc. $5M Inside Loan Note Mike Stock sale $5M ESOP Employee Participants 75

76 Buy-Sell Agreements SECTION TITLE GOES HERE

77 Business Transition Options Business Owner Family Charitable Key Employees Co-Owners External Buyer (retire) External Buyer (continue) Public Markets Transfer Methods Outright Gift SCIN Private Annuity FLP GRAT IDGT CRAT CRUT CLAT CLUT Private Foundation MBO ESOP Synthetic Equity Exec Comp Planning Alternatives Cross Purchase Entity Redemption Hybrid Buy-Sell Agreement Strategic Sale Auction vs. Negotiated Sale Process Majority or Partial Sale to a Financial Partner Debt /Equity Recap IPO DPO Reverse Merger Going Private 77

78 One Way Buy-Sell 78

79 One Way Buy Sell Assume: Jim dies, Hank sells business for $12 million Return to Jim s Family: Payment from Hank $9M Estate taxes (4M) Net return $5M Return to Hank Sales proceeds $12M Income tax (.6M) Net return 11.4M 79

80 One Way Buy-Sell 80

81 One Way Buy-Sell Assume: Jim dies, business sold for $12 million Return to Jim s Family: Proceeds from sale $9M Estate taxes (4M) Life insurance (tax free) 9M Net return 14M Return to Hank Sales Proceeds $3M Income tax (.6M) Net return 2.4M 81

82 The best way to predict the future is to create SECTION it. TITLE GOES HERE -Peter Drucker WTLG