Business Succession Planning Presentation

Business Succession Planning


During This Session You Will Learn:

What is a Business Succession Plan

Why does every business need one

The components of a succession plan

How to start the process

Adapted from Business Succession Planning Model, Community FuturesMeridian Region, Western Economic Diversification Canada


Business Succession Plan:

A Business Succession Plan is a multidisciplinary processproviding a comprehensive and strategic approach to guidingthe transition of business ownership.

It is a roadmap…you can never start too early It is to be a dynamic document…changes with you Used as a guide to manage the issues of transition It allows the business owner to anticipate and manage change Should be coordinated with the owner’s estate plan Unique to each owner… “one size does not fit all”


Why do you need one?:



A Business Succession Plan is an important component of anybusiness’ strategic process. It will aid the business owner in:

Preparing for the time when they will retire

Addressing extreme matters such as illness or death

Securing the survival of the business through transition of ownership

Maximizing the return of the retiring owner’sinvestment

Minimizing tax burden at transfer



By not preparing a Succession Plan the business owners risk:

Monetary loss due to unexpected estate, gift, and income taxissues

Huge gaps in wealth from lack of business valuation activitiesand financial planning

Jeopardizing the future of the business



In summary a Business Succession Plan is needed:

Proactively identify the new owners

Family, employees, third party or combination

To address the orderly departure of owners from a business

To address the transfer of ownership for an unplannedcircumstance (i.e., partnership disagreements,illness, death)


The Reality For Business Owners

80% of business owners are exiting their business to retire,they are not serial entrepreneurs

The principal fear is “Will I have enough money so that I can fundmy retirement lifestyle without running out of money”?

Other considerations may include wealth transfer to thenext generation, charitable giving, and minimizing taxes

They want to identify the potential buyer/owner

They want to pass along a business legacy



Typically 50-75% of a business owner’s net worth is inhis/her business assets. The balance is in their personalreal estate & financial investments

You only have ONE chanceto transfer your largest asset

Equities

Real Estate

Business



Most business owners have only an anecdotalperception of the value of their business…“My brother in law knew a guy who had abusiness like mine that sold for…”

Relying on this type of perception can leadto large gaps in future wealth and quality of life

Important to have realistic expectations fromthe beginning



85% of all small business owners do not have a BusinessSuccession Plan, a wealth management plan, and/or anadvisory team to assist them

Very few start the process early enough to achieve themaximum benefit of valuation and planning…its never tooearly



Ideally the process should start when the business starts orbecomes viable. It should encompass:

Entity structure Owners as individuals Shareholder, member, or partnership agreement


There Are Only 5 Places Your Money Can Go

and/or Creditors


…And the 5th Place Your Money Can Go

Your advisors…pay a few modestly at the beginning and alongthe way

…Or pay many handsomely at the end

A Business Succession Plan will let YOU decide where your hardearned assets end up


Components of the BusinessSuccession Plan


Components of the BusinessSuccession Plan

Establishing Goals and Objectives

Family Involvement in the Process

Identifying Successors

Estate Planning

Contingency Planning

Entity Structure, Transfer Methods, Taxes

Business Valuation

Exit Strategy

Implement & Follow-Up





Owner retirement goals

How do you plan to spend your retirement?

Family member goals

Involved/not involved in business?

How will they be impacted?

Goals of other stakeholders (partners, employees)

Will business transfer to them?

How will the business operate during transition?

Goals for addressing disagreements, illness, and death

Assessing your risk tolerance





Communication Establish a formal process of communication

Process for hearing concerns & opinions

Process for handling family change & disputes Divorce, death, injury

May involve outside help (lawyers, accountants)

Family vision for the business

Relationship between family & business Separate the two


Indentifying Successors


Indentifying Successors

Who will take over the business Partner, Family member, employee, third party buyer

Training Successors Establish a training plan

Build support for successors Among family members, employees, customers, suppliers

Teach successor to build vision for the business It may be different from yours

All affected parties must be “on board”


Estate Planning


Estate Planning

Provision for family members Develop Estate and Personal Financial plans for owners, spouses, family

members

Active & Non-active family members

Other financial considerations Financial issues relating to the transfer of the business

Plan for the value at exit, provision for gaps


Estate PlanningGift Tax

35%$1,000,000$330,8002011

35%$1,000,000$330,8002010

45%$1,000,000$345,8002009

45%$1,000,000$345,800$12,0002008

45%$1,000,000$345,800$12,0002007

46%$1,000,000$345,800$12,0002006

47%$1,000,000$345,800$11,0002005

48%$1,000,000$345,800$11,0002004

49%$1,000,000$345,800$11,0002003

50%$1,000,000$345,800$11,0002002

MaximumMarginal Tax

Rate

ApplicableExclusionAmount

ApplicableCredit

Amount

Annual ExclusionAmount

Per Donee

Year


Estate Planning

Taxes

Must be carefully considered to retain wealth

Requires professional advice and thought out Exit Plan

Retirement Income

Identify sources and quantity of wealth required

Establish a wealth plan to preserve quality of lifein retirement


Estate Planning

50%$1,000,000$345,8002011 and thereafter (unless Congress intervenes)

REPEALED2010

45%$3,500,000$1,455,8002009

45%$2,000,000$780,8002008

45%$2,000,000$780,8002007

46%$2,000,000$780,8002006

47%$1,500,000$555,8002005

48%$1,500,000$555,8002004

49%$1,000,000$345,8002003

50%$1,000,000$345,8002002

MaximumMarginal Tax

Rate

ApplicableExclusionAmount

ApplicableCredit

Amount

Year

Estate & Generation-Skipping Transfer Tax





Plans rarely proceed smoothly

Economic downturns Illness/death of owner or key employee Natural disasters

Look at “What if” scenarios

Prepare a list of possible situations Identify the course of action Formalize it in a legal document Fund contingencies with insurance or other investment

vehicles





Identify roles & responsibilities

Family members & key employees should have clearly defined roles

Fill key positions

Management positions

Specialty positions

Structure organization based on the successor

Establish roles for family members

Separate ownership & management roles



Role of retiring owner

Advisor, Consultant, Chairman of Board

Identify key members of transfer team

Attorneys

Accountant

Intermediary

Business Brokerage or M&A Firm

Financial Partner

Bank, SBA, Venture Capitalist, PEG



$ 016,05065,100

131,450200,300357,700

10%$ 1,605.00 + 15%

8,962.50 + 25%25,550.00 + 28%44,828.00 + 33%96,770.00 + 35%

$ 0 $ 16,05016,050 65,10065,100 131,450

131,450 200,300200,300 357,700357,700 . . . .

of the amountover--

The tax is:If taxable income is:but not

Over-- over--

2008 Tax Rates


Entity Structure, Transfer Methods,Taxes

2008 Tax Rates

Generally, gain from the sale of long-term (held more than 12 months)capital assets and qualified dividend income are subject to a maximumcapital gains tax rate of 15% (0% for individuals in the 10% or 15% taxbracket through 2010).


Business Valuation


Business Valuation

Identifies what is being sold

Inventory, Equipment, Real Estate, Stock

Establishes profitability

Assesses risk

Identifies value drivers

Scans marketplace

Considers financing strategies

Establishes relationship between earnings and value

Should be done cyclically with business planning


Business Valuation

Market Valuation

Strategic & Synergistic

Value Applied

Buyer

&

Seller

Direct Asset

or

Stock Sale

Unrelated 3rd PartyIndividual or

Strategic

Market Value

or

Investment Value

ManagersMBO

Buy Sell Agreements

Managers

Fair Market Value withdiscounts formarketability & minorityshare

IRS

ESOP

Trust

Gifting

Employees

or

Family

StandardAuthorityMethodExit Avenue


Strategies for Maximizing Value

Value your business early… and often

Focus on implementing business improvements

Clean financial records & systems

Clear ownership and control of intellectual & tangible property

Owner is not the key employee

Succession plan for key management positions

Policy manual exists and is updated regularly

Customer concentration issues addressed

Facility and operation is clean and orderly

Minimal overlap between owner’s personaland business expenses


Exit Strategy


Exit Strategy

Transfer method

Family, employees, third party

Establishes timelines

Identifies schedule for implementation

Published & distributed to stakeholders

Clarifies roles and responsibilities

Allows resolution for issues prior to transfer

Aids in ensuring owner’s whishes are adheredto in case of illness or death


Implementation & Follow-Up

Review on same cycle as business planning

Update & modify as circumstances change

Conduct business valuations on same cycle to ensure thatbusiness is on track


Most business owners spend more time planning a family vacationthan how to exit from their business.

This is not due to a lack of desire or intelligence.It is simply because they don’t know how or where to begin.

The vast majority of owners are unaware there is a specific planningand implementation process that can help ensure they achieve their

objectives.