New Directions in Dealership Succession Planning it s getting more complicated

Transcription

1 New Directions in Dealership Succession Planning it s getting more complicated With Ron Sompels, Richard Kotzen, and Marv Hills from Crowe Horwath LLC Moderated by Mike Bowers Executive Editor at DealersEdge

2 Crowe Retail Dealers: Assurance Tax Financial Advisory Risk Consulting Performance New Directions in Dealership Succession Planning: It s Getting More Complicated Ron Sompels, Richard Kotzen, and Marv Hills 2

3 Notice These slides for the webcast presentation ("presentation") have been prepared to present general information on selected accounting and reporting subject matter. The content of this presentation, which is the copyrighted work of Crowe Horwath LLP, does not constitute audit, accounting, financial reporting, income tax reporting or any other professional advice and should not be relied upon as such. The content of this presentation should not be duplicated or redistributed. Crowe Horwath LLP shall not be responsible for any loss sustained by any person or entity that places reliance on the content of this presentation. The content of this presentation was not intended to be used, and cannot be used, to avoid any government penalties that may be imposed on a taxpayer. 3

4 Presenters Rick Kotzen, CPA: Richard Kotzen has devoted his professional career to performing consulting, merger and acquisition, litigation support, and assurance services to single-point, mega-dealership groups, and publicly traded consolidators. Mr. Kotzen leads our retail dealer litigation support and expert witness practice, and is certified in federal court as an expert in the retail automotive industry. Mr. Kotzen has participated in negotiating, analyzing, and performing due diligence for transactions in excess of $1 billion and for more than 100 dealerships. He has gained national recognition for both his knowledge and experience in working with dealerships as a lecturer on issues affecting the industry. He is a CPA, member of Florida s and Pennsylvania s institute of CPAs societies, AICPA, and the National Association of Dealer Counsel (NADC). Mr. Kotzen graduated Summa Cum Laude from George Washington University with a Bachelor of Arts (BA) in Accounting. 4

5 Presenters Marv Hills, CPA: Marvin Hills is the partner-in-charge of the private client services practice of tax. He is a member of the American Institute of Certified Public Accountants (AICPA), the Indiana CPA Society, the Personal Financial Planning Division of the AICPA, and the Society of Financial Service Professionals. Mr. Hills is a past president and current member of the Michiana Estate Planning Council. Mr. Hills is a frequent speaker for professional and civic organizations on estate planning and fiduciary income taxation topics, including seminars taught for PESI, the Notre Dame Tax and Estate Planning Institute, the American Bankers Association, and the Illinois Bankers Association, and presentations to the Indiana Continuing Legal Education Forum, the Young Lawyers Section of The Chicago Bar Association, and the Estate Planning Council of Indianapolis. He has written articles on various topics for publications including The Tax Advisor, Hoosier Banker, Taxes The Tax Magazine, and Kentucky Banker. Mr. Hills graduated Summa Cum Laude from Anderson University. 5

6 Presenters Ron Sompels, CPA: Ronald Sompels is a partner at Crowe Horwath LLP, a top 10 public accounting and consulting firm. Mr. Sompels, a CPA and CPIM, is the Partner-in-Charge of Crowe s Retail Dealer industry horizontal and has more than 30 years experience in providing assurance, tax, risk management, financial advisory, and performance consulting services to more than 600 retail dealerships. He has conducted courses on many subjects, including inventory control, and is a published writer, with articles featured in trade magazines, periodicals, and business journals. Mr. Sompels holds a Bachelor of Business Administration in Accounting from Western Michigan University. 6

7 Agenda Rick Kotzen Relevancy of this topic in today s environment Succession from the manufacturers view Consequences of not addressing this issue now How to get started Marv Hills Differences between succession and estate planning and importance of integrating these plans Importance and urgency of addressing these issues now Issues to consider Ron Sompels Crowe introduction Issues to consider in preparing your dealership for sale 7

8 Introduction to Crowe and the Retail Dealers Practice Crowe Horwath LLP is a top ten public accounting and consulting firm with over 25 offices, coast to coast, serving clients in all 50 States. We have a dedicated Retail Dealer practice with more than 70 professionals who spend 100 percent of their time working with Retail Dealers. Crowe Retail Dealers practice has manages over 400 relationships representing 600 dealerships. Today s presenters are Partners in our retail dealer group and our Estate Planning group. Their contact information can be found at the end of the presentation. 8

9 Background Background information Combining Crowe s thought leadership in the Dealer space with expertise in estate and succession planning offers a unique solution to the market place. We have met with major manufacturers to understand their concerns and goals related to dealership succession plans. We understand their thinking on the successor s: Individual qualifications Ownership requirements Ability to exercise control over major decisions Structure of organization Importance of integrating succession and estate planning in today s environment. 9

10 Succession and Estate Planning The overall goal is to create a legacy that will continue for many generations. Succession Planning: Focus is on the transfer of management (and ultimately control) from the Current Dealer to the Successor Dealer or Operator. Estate Planning: Focus is on the transfer of ownership of assets (including businesses) to the intended beneficiaries using the most tax efficient and administratively efficient methods possible. 10

11 Hypothetical Ownership (With Holding Company) December 2009 Dealer Child #1 Board of Directors Child #2 10% 90% Holding Holding Company Company Inv. #1 Inv. #2 Other Misc. Investments Gen l Mgr Gen l Mgr 15% 85% 100% 100% 85% 15% Honda Honda Point Point Toyota Toyota Point Point BMW BMW Point Point Chrysler Chrysler Point Point = Ownership = Management Succession Issues = Ownership Issues responsibility or = liability Advisory for acts or omissions Roleof Crowe Horwath International or any = other Governance Crowe Horwath International Issues member. Accountancy services in Kansas and North Carolina are rendered by = Estate Planning Issues 11

12 Hypothetical Ownership (No Holding Company) December 2009 Dealer Child #1 Child #2 Board of Directors 10% 90% Inv. #1 Inv. #2 Other Misc. Investments Management Management Company Company Gen l Mgr Gen l Mgr 15% 85% 100% 100% 85% 15% Honda Honda Point Point Toyota Toyota Point Point BMW BMW Point Point Chrysler Chrysler Point Point = Ownership = Management Succession Issues = Ownership Issues and its affiliates = Management are not responsible or liable for any acts or omissions of Crowe = Horwath Governance International or any Issues other member of Crowe Horwath International and specifically disclaim any and all Fees = Estate Planning Issues 12

13 Succession Planning Aging Dealer Population As the dealer community ages the turnover in the dealer body will accelerate. Each month in Automotive News we are seeing dealers receiving and 40 Year awards from Manufacturers -- many dealers are now settling into their 70's to 80's. 2 5 Y ear A w ard 5 0 Y e a r A w a r d 13

14 Succession Planning is on the Radar of Financial Institutions who bank dealers. Manufacturers who are concerned about their future leadership in their dealership bodies. The Dealers who are aging. Contrary to popular opinion, immortality has NOT been achieved in the Dealer Community. Manufacturers and Financial Institutions are increasing their level of scrutiny. Mortality statistics show transition is a near- term issue for a high percentage of the aging dealers. 14

15 Should You Care? Should Dealer/Operators care what Manufacturers and Financial Institutions have on their radars screens????? Hopefully today's seminar will assist in bringing clarity to those issues!!!!! 15

16 Two Independent Processes Succession Planning and Estate Planning are two independent processes. One over-all plan that fits the Succession and Estate Planning puzzle pieces together will mitigate the risk of a negative impact when a triggering event occurs. Es t a t e P l a n S u c c e s s io n P la n 16

17 Two Independent Processes Who is at risk when a triggering event occurs? Dealer/Operator; The Dealership or Dealership(s) Corporations; Immediate family members; Key employees; Other long-term valued employees; Manufacturers; and Lending Financial Institutions. 17

18 Financial Institution s Perspective Today's economic environment is forcing Financial Institutions to mitigate risk. Understanding the Succession Planning of their borrower/ customers is now another area of risk mitigation. 18

19 Why Are Financial Institutions Concerned? One of their critical lending criteria is the relationship with the Principal Borrower -- The Dealer. The day a triggering event occurs the Financial Institutions loses a portion of the linkage they have with the Corporation. This increases the Financial institution s risk scenario of principal losses. 19

20 Impact on Automotive Lenders Automotive Lenders - the lending due diligence process will be expanded to understand the Succession Plan of their borrower/customers. The critical life blood of a dealership: borrowed funds; Could depend partially on having a viable plan for succession in the case of a triggering event. 20

21 The Manufacturer Perspective The Manufacturers are particularly concerned by the age of the dealer community and the future leadership of their dealerships. As turnover increases in dealer body it becomes a major threat to the brand stability. Manufacturers want to protect and grow their brands as the transition to the next generation Dealer/Operators occurs!!!!! It s NOT going to be business as usual for Manufacturer to approve spouses, relatives, GMs or some other designated party or entity to be the successor s Dealer/Operators. 21

22 The Manufacturer Perspective Manufacturers are particularly sensitive to prior changes in ownership that have been implemented due to succession and /or estate plans. Concern stems from intentional or unintentional lack of required notification of changes in ownership. Many Dealers or their beneficiaries may find out they are in violation of their dealership agreements if the ownership structure is not approved by the Manufacturer. It could be a catastrophic event forcing a sale of the franchise at in-opportune time. 22

23 Ownership Transfers Such ownership transfers are as follows: Family Members; General Managers; Holding Companies; Trusts; and Charities. Holding Companies, Trusts, and Charities present very complicated set of issues to Manufacturer. Estate Plans that have transferred ownership should seek the their respective Manufacturers approval. 23

24 The Value of the Succession Plan No matter whether you are the entrepreneurial dealer who wants to sell or See your dealership or dealership s transition to new leadership: A succession plan is extremely valuable to the dealer. 24

25 Triggering Event without a Viable Succession Plan Most, if not all, the following negative scenarios will play out within their dealership or dealerships Significant drop in CSI and SSI results; Erosion in service parts and Body Shop operations; Lower new and used unit volume sales; Loss of key employees; Reputation loss in business and customer community; Drop in lenders confidence leading to alteration in debt; structure; Loss in Manufacturer backing and confidence; 25

26 Triggering Event without a Viable Succession Plan Most, if not all, the following negative scenarios will play out within their dealership or dealerships continued: Significantly weakened financial structure - need for recapitalization of the business; Un-foreseen material expenditures; Lower profitability or significant Losses; Significant deterioration in enterprise value; Litigation among shareholders and or family members; Forced to sale - many times at a distressed price. Winners - Lawyers and future acquirer. A terrible outcome for the many years of building a successful business. 26

27 Why Focus on Estate Planning Now? The Perfect Storm Current economic conditions Value of assets are depressed. An asset valued at $XX two years ago, may be 50% of $XX today. Current interest rates are at historic lows. Sales to heirs today can be financed at under 2.7% for up to nine-year notes. (Under 4.2% for long-term) Current political climate Proposed legislation threatens to repeal useful estate planning techniques. 27

28 Historical Perspective Applicable Exclusion Against: Year Estate Tax Gift Tax Max Rate 2001 $675,000 $675, % 2002 $1.0 million $1.0 million 50 % 2004 $1.5 million $1.0 million 48 % 2006 $2.0 million $1.0 million 46 % 2008 $2.0 million $1.0 million 45 % 2009 $3.5 million $1.0 million 45 % 2010 (repealed) $1.0 million 35 % ** 2011 on $1.0 million $1.0 million 55 % ** The 35% tax rate for 2010 applies to gift tax only. 28

29 Benefits of Lifetime Transfers Tax Benefits: Potential to remove assets from taxable estate now, without increasing future estate tax liability: Annual Exclusion Gifting Transfer assets at discounted value Shift future appreciation to heirs Non-Tax Benefits Recipient has pride of ownership (motivation). Recipient has potential for increased cash flow. 29

30 Transfer of Ownership: Method Constraints Sale Gift Inheritance 1. No buyers 2. Income Tax 1. Need the income 2. Gift Tax 1. Owner must die 2. Estate Tax 30

31 Estate Planning Techniques QTIP Credit Shelter Outright Gifts Crummey Power IDIT (or IDGT) Living Will Living Trust GRATS Dynasty Trust ILIT P.S. 58 CRAT FLP SCIN NIMCRUT GST QPRT CLUT 31

32 Estate Planning Techniques QTIP Credit Shelter Outright Gifts Crummey Power IDIT (or IDGT) Living Will Living Trust GRATS Dynasty Trust ILIT P.S. 58 CRAT FLP SCIN NIMCRUT GST QPRT CLUT 32

33 Lifetime Gifting Strategies Two Methods of Gifting (Control Issues): Outright Direct Gift Recipient Controls Property (Less of an issue/concern for Non-Voting Stock) Gift to a Trust Recipient is merely a beneficiary (Trustee manages the property, and cash received) Timing and Amount Annual exclusion gifting program Lifetime exemption gifting program 33

34 Annual Gift Tax Exclusion The first $13,000 of gifts of a present interest made by a donor to each donee in each calendar year is excluded from the amount of the donor s taxable gifts. 34

35 Annual Gift Tax Exclusion Dad Mom $13,000 $1 3, $1 3,0 0 0 $13,000 Son Daughter Gifts made = $52,000 Gift tax due = $0 Lifetime Exemption Used = $0 35

36 Annual Exclusion Gifting Program Why? Potential to transfer significant value that would otherwise be subject to estate tax. 36

37 Lifetime Gifting Program ($52,000 / year) Estate value Without Gifts 1/1/09 2,000, ,160, ,332, ,519, ,720, ,938, ,173, ,427, ,701, ,998, ,317,850 With Gifts 2,000,000 2,103,840 2,215,987 2,337,106 2,467,915 2,609,188 2,761,763 2,926,544 3,104,507 3,296,708 3,504,285 Estate tax: 1,943,033 1,576,928 Tax savings = $ 366,105 Assumes 8% growth and 2009 tax rates 37

38 Additional Gifting to Use Lifetime Exemption Make gifts in a year that exceed the $13,000 exclusion, and thus utilize up to $1,000,000 of lifetime gift exclusion. No gift tax due, provided that the cumulative gifts are less than the $1 million exemption. Total gift/estate tax burden will be reduced by removing future appreciation from estate. Use discounted value of assets if possible. 38

39 Gift Strategies Discounting opportunities Minority Interest (a/k/a lack of control ) What would you pay for 49% of a company? Rev. Ruling requires the IRS to ignore family attribution ; thus minority discounts authorized Lack of Marketability It takes time to find a buyer for a closely-held Business. Professional valuation is important What is a business worth? (Depends who s asking.) Providing adequate disclosure to IRS will start the three-year gift tax statute of limitations. 39

40 $1 Million Outright Gift Without Gifts 1/1/10 $10,000,000 With Gifts $ 9,000,000 Estate value at Death $30,000,000 Exemption (3,500,000) Taxable Amt. $26,500,000 $27,000,000 (2,500,000) $ 24,500,000 Estate tax: $ 11,925,000 $ 11,025,000 Tax savings = $ 900,000 Assumes 2009 tax rates 40

41 Straight Sale Transaction Seller Stock $5MM $5MM note payable over 9 years with 2.7% interest Income Tax Result: 1.Seller pays ordinary rates on interest, and capital gain tax on principal 2.Buyer pays income tax on future profits. Buyer Estate Tax Result: Only remaining note balance (and unspent proceeds) are taxable. 41

42 Sale to a Grantor Trust In general, both the income tax and estate tax laws provide that if a taxpayer transfers property to a trust but continues to control either the trust or the property, the IRS will simply ignore the existence of the trust. However, the test for what constitutes control is different for income tax purposes than it is for estate and gift tax purposes. 42

43 Intentionally Defective Trust Taxpayers can take advantage of these rules to make the trust intentionally defective for income tax purposes. It still is a valid transfer for legal purposes, as well as for estate and gift tax purposes. 43

44 Intentionally Defective Irrevocable Trust -- Example Dad (1) Initial Gift: $280,000 Cash IDIT $280,000 Cash 44

45 Dad Value of Total Company Portion of Stock Sold Gross FMV Valuation Discounts (30%) Net Fair Market Value $10,000,000 X 40% 4,000,000. (1,200,000) $2,800,000 ( 2 ) Sal e ( I n c o m e T ax F r e e ) Stock $2,800,000 9 Year 2.7% Note $2,800,00 0 Stock $2,800,000 IDIT $280,000 Cash 45

46 S Corp Distribution ($800,000) S Corp Dad 60% ($480,000) IDIT (3) 40% ($320,000) Stock $2,800,000 9 Year 2.7% Note $2,800,000 $280,000 Cash 46

47 Optional Purchase of Life Insurance Dad IDIT 9 Year 2.7% Note $2,800,000 Stock $2,800,000 Life Insurance Policy $600,000 Cash $2,500,000 Insurance Company 47

48 I.D.I.T. Example Dad S Corp IDIT * Cash: Gift Dividend Insur. Net $280, ,000 (5,000) $595,000 9 Year 2.7% Note $2,800,000 Stock $2,800,000 Life Insurance Policy $595,000 Cash * $2,500,000 (4) $5,000 Annual Premium Insurance Company 48

49 I.D.I.T. Note Payment Dad S Corp IDIT 9 Year 2.7% Note $2,550,00 0 $325,000/year Principal & Interest (Income Tax Free) Stock $2,800,000 Life Insurance Policy $270,000 Cash (5) $2,500,000 Insurance Company 49

50 I.D.I.T. Summary of Year One S Corp Dad (1) Initial Gift: $280,000 Cash ( 2 ) Sal e ( I n c o m e T ax F r e e ) Stock $2,800,000 9 Year 2.7% Note End of Yr.: $2,550,000 $325,000/year Principal & Interest (Income Tax Free) Stock $2,800,000 IDIT $270,000 Cash (5) Life Insur. Policy $2,500,00 0 (4) $5,000 Annual Premium (3) Annual Dividend $320,000 Insurance Company 50

51 I.D.I.T. Income Taxes Dad Dad taxable on S Corp Income: Directly owned (60%) $1,200,000 Owned by IDIT (40%) 800,000 Total $2,000,000 IDIT Income (40%) $800,000 IDIT S Corp Total Profits $2,000,000 Tax Owed (40%) Cash Received (Note) Increase in Cash Reduction in Note Change in Net Worth $(320,000) 325,000. 5,000.. (250,000) $ (245,000) Stock (40%) $2,800,000 Ultimate Beneficiaries Children / Heirs 51

52 Benefits of IDIT Technique Selling assets at discounted values. No income tax on sale, or on note payments. Any increase in the value of the original asset sold to the trust avoids estate tax. The value of the note (included in seller s estate) does not appreciate, other than for interest earned on the note. Grantor pays all income taxes on profits or gains on trust assets, resulting in a further reduction of his estate with no gift tax. 52

53 Grantor Retained Annuity Trust (GRAT) Alternative Technique: useful when transferor has previously utilized all gift tax lifetime exemption. Transfer assets to an irrevocable trust, in exchange for a series of payments from the trust. Taxable gift is difference between value of property and the Present Value of the series of payments. You are treated for income tax purposes as if you still own the assets until all payments are made. For Estate Tax Purposes, the assets are only taxable if you die before all payments are made as scheduled. 53

54 Grantor Retained Annuity Trust (GRAT) Dad Dad s Estate Stock $5,000,000 $648,170/yr GRAT - 9-Year Term FMV $ 5,000,000 Value of annuity 4,999,983 Taxable gift 17 Stock If Dad does not live 9 years, stock will be taxed in his estate at FMV. However, the assets will remain in trust, with remaining payments made to Dad s estate. Assumes 10% Growth and/or income Discount rate 3.2% (December 2009) $ 2,987,929 In 9 years Child(ren) 54

55 Fundamental Road Map Questions to be Answered 1. Is a Successor Dealer/Operator identified for all dealerships that will continue after the triggering event? 2. Does that successor candidate have relevant automotive experience and meet the manufacturer criteria and expectation of a Dealer/Operator; or how will it be achieved over time? 3. Do any of the following individuals truly meet manufacturers requirements - Be realistic it s critical : Surviving spouses, sons, daughters, other relatives, GM and other designated person. 55

56 Fundamental Road Map Questions Answered 4. Who will have the actual operating control of the dealership and have the authority to assure the dealership is in compliance with Manufacturer s policies and procedures? 5. Who will have the voting control over the dealership? Governance issues - Successor Dealer/Operator or the investor shareholders. 6. Will the Successor Dealer/Operator have a significant equity position? 7. Who has authority to raise capital to meet the Manufacturer working capital levels - investor shareholders and/or the successor Dealer/Operator? 8. What voting and operating rights do the Non-Dealer Investor shareholders possess? 56

57 Fundamental Road Map Questions Answered 9. How are OTHER key employees brought into the plan? 10. Is financing in place to achieve the plan? Dealer or Corporation funding for buy in or outs; Financial Institution funding phantom stock plans, deferred compensation plans, etc Does the succession plan and estate plan dove tail into one coordinated plan and are both plans documented? 12. Does the succession plan violate any Manufacturer banking or other critical agreements? Moral of the story get the appropriate approvals for the plans!!!!!! 57

58 Preparing your Business for Sale Focus on the bottom line, not the top line Multiples are based on earnings, not revenue; Buyers are paying up to 7x profits, so $1 saved is $7 earned ; The most recent year is the most important year for Blue Sky. Eliminate all controversial spending Don t make add backs a negotiation point eliminate them where possible. Push managers hard to maximize results Older dealers get into the don t mess it up mode and may not be demanding on staff. If there is an operational problem, take as much expense as possible in one month rather than dragging it forward over future months Makes identification of normalization item easier. 58

59 Preparing your Business for Sale Negotiate OEM required facility actions pre-sale OEMs may be easier on the existing dealer than an entering dealer Buyers will magnify and over estimate unknown costs Negotiate and get agreement but don t necessarily make the expenditures. Reduce non-essential cap exp to reduce price to buyers Capitalize items whenever possible rather than expense. Clearly document any non-recurring expenses so they can be added back MAKE IT EASY FOR A BUYER TO UNDERSTAND THE VALUE IN THE DEALERSHIP 59

60 Questions 60

61 More Information Richard Kotzen, CPA Crowe Horwath LLP Marv Hills, CPA Crowe Horwath LLP Ron Sompels, CPA Crowe Horwath LLP Download Dealership Flash article on Estate Planning at For more information on this subject, or to discuss your specific situation, contact the presenters or your Crowe representative. 61