Hosted by CBIZ and Mayer Hoffman

McCann P.C. and Spencer Fane

WELCOME TO OUR SECOND ANNUAL A/E/C SEMINAR

AGENDA & GUEST SPEAKERS

Transition & Next Generation Planning Presented by: Joyce Farris & David Seitter

Break Enjoy a cookie & some fruit

Legal trends for the AEC Industry Presented by: David Schatz

Break

Hot TopicsPresented by: Joyce Farris & Erika Cundiff,

TRANSITION PLANNING

SUCCESSFUL BUSINESS EXECUTIVES!

JACK

• Owns and manages a profitable, multi-state electrical company which he inherited from his father 30 years prior.

• Has one daughter from his first marriage; however, daughter does not work in the company.

• Recently married his 2nd wife….No prenuptial agreement signed.• Holds all of the state electrical licenses in his own name. • No will or transition documents in play.• No life insurance on Jack because he has medical issues in prior

years.• No management team because Jack does it all.• All of his personal assets are tied up in the company.• Jack is enjoying life!

JILL• Owns and manages a profitable concrete/paving

contacting firm.• Purchased the firm from a non-related party and is still

paying on the purchase note agreement.• Operates as a minority, woman owned business.• Is single with no heirs.• No will or transition documents in play.• Has a capable and reliable management team in place.• Maintains a life insurance policy to cover the original

purchase of company and bank debt.• Is planning to live forever.

EVERYTHIN IS GOOD FOR JACK AND JILL

Jack’s Electrical Jill’s Concrete

ONE ICY MORNING ON THE WAY TO THE OFFICE

Jill and Jack collide in a not so forgiving accident! No survivors!

JACK AND JILL HAD BEEN TOO BUSY FOR TRANSITION PLANNING

Jack’s Electrical Jill’s Concrete

JACK’S COMPANY – AFTER ACCIDENT

• New wife steps in to take control of Company• Project managers demand high bonuses to complete jobs• Company fired from certain jobs because Project Managers

resign immediately• Various states provided notice of license revocation if a new

electrical master is not named within 30 to 90 days• Wife drains all available cash from the Company• Surety company steps in and takes over completion of

specific bonded jobs then sues the company for recovery of costs

• Bank forecloses on building• Company terminates• Daughter inherits NOTHING

JILL’S COMPANY – AFTER ACCIDENT

• Strong management team pulls together – meets with the bank, surety, and prior owner

• Life insurance is collected and is utilized to pay off the original purchase of company and the bank

• The surety company steps in to manage the bonded jobs, but allows the company’s management team some leeway

• Management team works with attorneys to start a new company and to negotiate and rewrite the existing contracts in to the name of the new company

• Company fired from certain jobs because of Minority participation is violated

• Jill’s Concrete is closed

IF ONLY A TRANSITION PLAN HAD BEEN IN PLACE….

TRANSITION PLANNING – Partners

Still to come……

TRANSITION PLANNING – Family Members

Still to come……

TRANSITION PLANNING – WHAT IS IT?

• Planning for ownership transition of the business during life– Upon disability– Upon retirement– To expand ownership (family/employees)– Upon departure of one or more owners

• Planning for the ownership transition of the business upon death

TRANSITION PLANNING – What Is It?

What then is transition or succession planning for you?

TRANSITION PLANNING – Options?

Do Nothing

Transfer to Heirs Transfer

To Employees

Business Disposal

TRANSITION PLANNING – Do Nothing?

To Do Nothing is like dropping the ball –

Its NOT an Option.

TRANSITION PLANNING

How do you begin the transition

planning process?

TRANSITION PLANNING –Assemble Your Team

• Key Company Personnel• Professional Advisors• Financial Planner• Insurance Agent / Surety• Strategic Planner

TRANSITION PLANNING - Formulate Long-Term Action Plan

TRANSITION PLANNING - Formulate Long-Term Action Plan

TRANSITION PLANNING - Formulate Long-Term Action Plan

Simon Sinek “Start With Why” TED Talk

TRANSITION PLANNING - Formulate Long-Term Action Plan

Most Important Phase of Transition Planning!

How do you know how to plan if you don’t know why you are

planning?

TRANSITION PLANNING - Formulate Long-Term Action Plan

• Family:– Preserve family ownership of business– Enhance and preserve family assets– Minimize tax burden

• Employees:– To reward key employees

• Personal:– To maximize future value /sales price– Create an efficient transition– Ability to retire

• Company:– Capital for continuing operations– Bonding capacity

TRANSITION PLANNING - Formulate Long-Term Action Plan

• Transfer all of business?• Transfer part of business?• Keep as family business?• Take on non-family partners?

TRANSITION PLANNING - Formulate Long-Term Action Plan

• Immediate• Within ? Years• At death

When?

TRANSITION PLANNING - Formulate Long-Term Action Plan

• Personal needs• Value• Taxes

HOW MUCH ?

TRANSITION PLANNING - Formulate Long-Term Action Plan

Family Objectives

Personal Objectives

Income taxes

Estate Taxes

Retiree Compensation

Desiredvalue maynot always be thesame

EstateValue

Company SaleValue

TRANSITION PLANNING - Formulate Long-Term Action Plan

TRANSITION PLANNING - Formulate Long-Term Action Plan

• Adjusted book value• Capitalized earnings• Industry benchmarks

VALUATION METHODS

TRANSITION PLANNING - Formulate Long-Term Action Plan

Understand how your business is valued & Strategize to increase value

• Eliminate items which reduce value• Reduce investment in assets which do not add

value• Increase items which add value• Maximize earnings

TRANSITION PLANNING - Formulate Long-Term Action Plan

Family / Heirs

Employees

Outsider(s)

WHO?

TRANSITION PLANNING - Formulate Long-Term Action Plan

Source: U.S. Surety Industry Survey and FMI

TRANSITION PLANNING – Sell to Outsider(s)

Buyers DON’T make offers sellers can’t

refuse!(for construction

companies)

TRANSITION PLANNING – Sell to Outsider(s)

• What do you have to sell?• Will management stay with new owner?• Determine potential union withdrawal

liability?

Long lead time to find a buyer.

TRANSITION PLANNING – Sell to Outsider(s)

• Few sales each year & normally only contractors buy other contractors

• Most are asset purchases, not stock • Usually not the most attractive

alternative to the seller• People are the most important asset• Large backlog is always good

TRANSITION PLANNING – Sell to Outsider(s)

TRANSITION PLANNING – Sell to Outsider(s)

Sale of Stock

versus

Sale of Assets

TRANSITION PLANNING – Sell to Outsider(s)

Seller’s Preferred Method = Stock Sale• Seller receives capital gain tax

treatment

• Purchaser generally cannot deduct purchase price until stock is sold

• Purchaser assumes all past liabilities of Company

TRANSITION PLANNING – Sell to Outsider(s)

Buyer’s Preferred Method = Asset Sale

• Seller generally taxed at ordinary income rates (With a C corp. could be double taxation)

• Purchaser receives a tax deduction• Depreciation• Seller retains all past liabilities of

Company

TRANSITION PLANNING – Sell to Outsider(s)

Alternative Method = Stock + Compensation

• Lower stock price in lieu of receiving compensation

– Consulting– Non-compete agreement

• Taxed as ordinary income to seller• Buyer receives tax deduction quicker• Buyer assumes all past liabilities of Company

TRANSITION PLANNING – Transfer to Family / Heirs

Family dynamics in the 21st Century

TRANSITION PLANNING – Transfer to Family / Heirs

TRANSITION PLANNING – Transfer to Family / Heirs

• Gift to family during life

• Bequest at death

• Sell to family

• Oldco/Newco Strategy

TRANSITION PLANNING – Transfer to Family / Heirs

• Annual exclusion = $14,000– Does not count towards the lifetime– Husband and wife can gift $28,000 to one heir

• Lifetime exclusion = $5.43 Million

• No taxes paid on gifts under exclusion amounts

• Top federal estate tax rate = 40%

• Transfer at lowest possible value– Discounts for marketability limits

TRANSITION PLANNING – Transfer to Family / Heirs

• Appropriate estate planning

• Funds for estate taxes– If total estate > $5.43 Million

• Bequest to family member qualified to manage business

Bequest AtDeath

Still to come……

TRANSITION PLANNING – Transfer to Family / Heirs

• Meet Dan and his son, Daniel.• Daniel wanted to be just like his father – joined

the family general contracting business• The general contracting business very

profitable while both were involved• Dan’s two other children, Kevin and Kendra,

did not join the family business - Kendra became a doctor and Kevin a school teacher

• Dan died suddenly from a heart attack• No transitioning planning had been performed;

however, his will left all of his stock in the Company equally to the three heirs

TRANSITION PLANNING – Transfer to Family / Heirs

• For estate purposes, a valuation of the Company was performed – low value

• Kendra had no interest in stock but instead requested the Company be sold to obtain cash to pay off her student loans from medical school

• Kevin decided he might want to have a job at the Company – now on payroll

• Daniel and the Company were forced to take on substantial debt to purchase Kendra’s stock at a litigated market value

• Kevin decided as an owner, he did not need to show up for work

• Daniel forced to “fire” Kevin and take on more debt to purchase Kevin’s stock.

• With two thirds of the equity in the Company now wiped out, Daniel is struggling to renew the line of credit and with bonding limits

• Needless to say, no more Family holidays for these three

TRANSITION PLANNING – Transfer to Family / Heirs

• During lifetime• Valuation depends on objectives• Estate tax vs. income tax

consequences

Sold

TRANSITION PLANNING – Transfer to Family / Heirs

NEWCO• Formed by family/heirs• Minimal investment• New contracts • Hire employees or lease• Rents office space• Leases equipment• Pays management fee

OLDCO• Completes existing contracts• Retains ownership of

equipment• Retains employees or transfers• Indemnifies bonds and

guarantees bank debt• Supports Newco

TRANSITION PLANNING – Transfer to Family / Heirs

• Separates future business liability and risk from valuable existing business assets

– Great for owners when liability exposure is significant i.e. gen contractors, architect firms, manufacturing, and home building

• Minimizes taxation on the transfer of assets– Newco utilizes assets leased from Oldco not purchased

• Allows for the directing of business cash flow– to either Oldco or Newco

• Allows for ongoing management involvement by the Oldco owners until satisfied the business can continue without them

Oldco / Newco

model

TRANSITION PLANNING

All businesses are dynamic!

TRANSITION PLANNING – Transfer To Employees

• Sell to Key Employee (s)

• Stock Compensation

• ESOP

• NewCo / OldCo

TRANSITION PLANNING – Transfer To Employees

• Key employee (s)

• Business valuation recommended

• May need to carry back a note

• May need to stay on in a reduced capacity for specified time

• Stock or asset sale

BUSINESS

SALE

100%

TRANSITION PLANNING – Transfer to Employees

• Common vision for Company

• Honest evaluation of capabilities

• Training and Mentoring

• Experience outside your Company

• Real authority

KEY EMPLOYEE

TRANSITION PLANNING – Transfer To Employees

• Key employee (s)

• How much should be sold?

• May need to carry back a note

• Valuation may be an agreed upon amount

• Options exist on how to transfer ownership

BUSINESS

SALE

< 100%

TRANSITION PLANNING – Transfer To Employees

• Stock bonus in lieu of cash

• Tax deduction for Company = FMV of stock distributed

• Taxable to Employee– Cash bonus to pay tax

• Shareholder dilution

Stock

compensation

TRANSITION PLANNING – Transfer to Employees

Employee

Stock

Ownership

Plan

TRANSITION PLANNING – Transfer To Employees

• Provides a market for the shares of successful closely held companies

– Partial or complete sale of owners stock

• To motivate and reward employees

• To take advantage of incentives to borrow money for acquiring new assets in pretax dollars

ESOP

TRANSITION PLANNING – Transfer to Employees

In almost every case, ESOPs are a contribution to the employee, not an

employee purchase

ESOP

TRANSITION PLANNING – Transfer To Employees

An ESOP is a tax-qualified, defined contribution, employee benefit plan (ERISA)

- Similar to a profit-sharing plan• Invests primarily in the stock of the

sponsoring company• “Tax-Qualified” in that sponsoring company

and selling shareholder receive various income tax benefits

ESOP

TRANSITION PLANNING – Transfer To Employees

• Company establishes a Trust Fund

• Company contributes cash to Trust Fund as a contribution to the benefit plan– Tax deductible– 25% of payroll for S Corporations, more if a C Corporation

• Trust uses cash to purchase stock from the departing stockholder

ESOP

TRANSITION PLANNING – Transfer To Employees

• Shares in the trust are allocated to individual employee accounts– Basis of relative salary– Other equal formula

• Generally all full-time employees over 21 participate in the plan

• Vesting schedule is in place

• Employees must be 100% vested within 3 to 6 years

• When employees leave the company, they receive their stock, which the company must buy back from them at its fair market value

ESOP

TRANSITION PLANNING – Transfer To Employees

• Shares in the trust are allocated to individual employee accounts– Basis of relative salary– Other equal formula

• Generally all full-time employees over 21 participate in the plan

• Vesting schedule is in place

• Employees must be 100% vested within 3 to 6 years

ESOP

TRANSITION PLANNING – Transfer To Employees

• Alternatively, the ESOP can borrow money to buy new or existing shares, with the Company making cash contributions to the plan to enable it to repay the loan

• Allows for the Company owner to be completely bought out in less time.

ESOP

TRANSITION PLANNING – Partners

Lets recap your plan up to now .. Unless you sold 100% of your Company .. You have either:

– Gifted or sold a portion to heirs, or– Gifted or sold a portion to employees

Either way, you now have

PARTNERS

TRANSITION PLANNING – Partners

ENGINEERS R US, INC.

• Renee, Mary, Liza, Ben and Josh – Partners in Engineers R Us, Inc.• The Company has been profitable every year of operations• All Partners signed a personal guaranty on the debt• No agreements between the Partners• Josh decides to leave the Company• Josh receives offer to purchase his stock from the disgruntled ex-wife of Ben

TRANSITION PLANNING – Partners

• Foundation of business succession• Restricts transfer of stock• Establish value of stock• Establish terms of buyout & non-

compete• Provisions for departing owners

– Death– Disability– Retirement

Buy / Sell Agreement

TRANSITION PLANNING – Partners

Redemptionvs.

Cross Purchase

Buy / Sell Agreement

TRANSITION PLANNING – Partners

Buy / Sell Agreement – Redemption• Between Company and Stockholder

• Common to fund redemption with insurance

• Insurance proceeds:– May be subject to Corporate AMT tax– May increase value of Company for estate taxes

TRANSITION PLANNING – Partners

Buy / Sell Agreement – Cross Purchase • Contract between stockholders

• Surviving stockholders purchase stock

• Insurance policies owned by stockholders

• Works best with on a few stockholders

TRANSITION PLANNING – Summary – 7 Steps

1. Set objectives2. Determine purchase price3. Determine value4. Convert business value to cash5. Transfer the business6. Develop a contingency plan7. Wealth preservation

TRANSITION PLANNING – Summary – Your Next Steps?

1. Plan for yourself. 2. Plan for your business.3. Test it.4. Get your team to buy in.5. Execute.

TRANSITION PLANNING

TRANSITION PLANNING –

QUESTIONS

Hosted by CBIZ and Mayer Hoffman

McCann P.C. and Spencer Fane

Trends in the Legal Construction Industry

Where are we going today:

• Workforce shortage• Trends in Real Estate for 2015• Trends in Construction for 2015• Risk Shifting

– Contracts– Insurance

Workforce Shortage

• Construction industry shed over 2.2 million jobs from 2007-2011

• So, what does this mean?– Risk to the Project– Risks of assignment/sub-contracting– Owners becoming more involved in sub approval– Subcontractor bonds– Subguard

Trends in Real Estate for 2015

• Multifamily– REIT– Institutional Investors

Trends in Real Estate for 2015

• Senior living– Some forecasts show the growth rate of the 75+

population more than doubling from between 1.0%-1.5% in 2013 to roughly 3% around 2018.

Trends in Real Estate for 2015

• Senior living– By 2030—when all baby boomers will have reached

age 65—there will be about 72.1 million older Americans—more than double their number in 2000—according to data from the Administration on Aging.

Trends in Real Estate for 2015

• Increased institutional money– “Foreign” investors– REITS

Trends in Real Estate for 2015

• Industrial– Growth in gateway markets– Amazon distribution model

• 70 distribution facilities totaling 54.8 million square feet• 18 sortation facilities totaling 5.7 million square feet

Construction Trends

• Union activity• Increased regulations

– 2014—78,978 pages of new regulations which impact contractors

• Interest rate increase?• Growth of P3s• Higher Education/Health Care

Contracts

• Pay-if-Paid – Single biggest shifting of risk between GC and Subs

• Scope of work• Indemnity• Liquidated damages

Contracts

• No additional days for weather• Waiver of consequential damages• Notice provisions• Differing site conditions

Designer’s Limitation on Liability

• Limit liability to cost of work or insurance– Up and Down Contract Chain

Confusion over Warranty Claims

• Express• Implied• Statutory

3.5 Warranty• 3.5.1 The contractor warrants to the Owner and Architect that materials

and equipment furnished under the Contract will be of good quality and new unless otherwise required or permitted by the contract Document, that the Work will be free from defects not inherent in the quality required or permitted, and that the Work will conform to the requirements of the Contract Documents. Work not conforming to these requirements including substitutions not properly approved and authorized, may be considered defective. The Contractor’s warranty modifications not executed by the Contractor, improper or insufficient maintenance, improper operation, or normal wear and tear and normal usage. If required, the Architect, The Contractor shall furnish satisfactory evidence as to the kind and quality of materials and equipment. AIA A201-2007

Other “Warranties” in Contract

• Work will be done to the “Highest Standard” of the industry

• Contractor will provide “Best Workmanship”• That the contractor is an “Expert”

“Industry Standard”

• People think standard construction contract contains a one-year warranty.– Limit warranty by annually 1 year

“One-Year Correction Period”• 12.2.2 AFTER SUBSTANTIAL COMPLETION

• 12.2.2.1 In addition to the Contractor’s obligations under Section 3.5, if within one year after the date of Substantial Completion of the Work. . . , any of the Work is found to be not in accordance with the requirements of the Contract Documents, the Contractor shall correct it promptly after receipt of written notice from the Owner to do so . . . During the one-year period for correction of Work if the Owner fails to notify the Contractor and give the Contractor an opportunity to make the correction, the Owner waives the right to require correction by the Contractor and to make a claim for breach of warranty. If the Contractor fails to correct nonconforming Work within a reasonable time during that period after receipt of notice from the Owner or Architect, the Owner may correct in accordance with Section 2.4.

Waiver of Subrogation• § 11.3.7 WAIVERS OF SUBROGATION

– The Owner and Contractor waive all rights against (1) each other and any of their subcontractors, sub-subcontractors, agents and employees, each of the other, and (2) the Architect, Architect’s consultants, separate contractors described in Article 6, if any, and any of their subcontractors, sub-subcontractors, agents and employees, for damages caused by fire or other causes of loss to the extent covered by property insurance obtained pursuant to this Section 11.3 or other property insurance applicable to the Work, except such rights as they have to proceeds of such insurance held by the Owner as Fiduciary.

Indemnity Clauses

• Broad– All losses arising out of the contract

• Middle– All losses from Contractor’s performance – less

Negligence of Owner• Limited

– Losses caused by Contractor’s negligence

Insurance

• Builder’s Risk– Who Buys?– Who is insured?– What does it cover?

• CGL

Insurance

• Professional liability– Not just for the architect anymore.

• Pollution• CCIP/OCIP

– Controlled Insurance Program

Managing Insurance Risk

• Coverage Gaps• Additional Insured's