The Seven Step Selection Planning Process
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Transcript of The Seven Step Selection Planning Process
Succession Plan Executive BriefingStep 2 Step 3 Step 4 Step 5 Step 6 Step 7 ConclusionStep 1Overview
How Selling A Business Can Be Enhanced
by Creating A Succession Plan
by Joe Rodwell
Exit Planning LLC
www.ExitPlanningMN.com
www.LinkedIn.com/in/JoeRodwell
Succession Plan Executive BriefingOverview Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 ConclusionStep 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 ConclusionStep 1Overview Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 ConclusionStep 1Overview
“Top Exit Planning Experts from Across the Country”
Joe Rodwell Exit Planning LLC
(Only entry from Minnesota)
Boomer Market Advisor January 2007: p. 62
Succession Plan Executive Briefing
Every business owner will sooner or later sell a business, and very few are adequately prepared.
Exit Planning LLC was founded to help business owners create a written Succession Plan that will allow them to sell their businesses, or cut back significantly from day-to-day operations, under the most favorable conditions.
Why Succession Planning?
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Succession Plan Executive Briefing
Step 1 - Identify Exit Objectives Step 2 – Identify Business & Personal Financial Resources
Step 3 – Maximize and Protect Business Value
Step 4 - Sale to Third Parties
Step 5 - Sale to Insiders
Step 6 - Business Continuation
Step 7 - Personal Wealth & Estate Planning
The Seven Step Succession Planning Process™
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Succession Plan Executive Briefing
“When a man does not know which harbor he is heading for, no wind is the right wind.” Seneca, 59 B.C.
Step 1: Identifying Succession Plan Objectives
Step 1Overview Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 Conclusion
Succession Plan Executive Briefing
Step 1: Identify Succession Plan Objectives
What is the exact date you plan to sell your business?
How much money – in cash – will you need each and every month after you sell your business?
Who do you want to own the business when you leave?• Family members• Other owners or Key Employees• Third Party
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Succession Plan Executive Briefing
Step 1: Identify Succession Plan Objectives
Characteristics of a Succession Planning Advisor Team
Owner selects Team Members
Demand experience in Succession Planning
Coordinated planning and action is key
Team members willing to work together
Owner’s Road Map is a written Succession Plan
Action Checklist is a guide for Advisor Team
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Succession Plan Executive Briefing
“Knowing where you are . . . helps map the destination.”
Step 2: Identify Business & Personal Financial Resources
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Succession Plan Executive Briefing
You must know the value, because to sell the business, you will need cash - from the business, and the business is generally the owner’s most valuable asset.
The owner and advisors need to know the current value of the business to determine if the owner’s financial objectives can be met at the present time.
What Is Your Business Worth?
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Step 2: Identify Business & Personal Financial Resources
Succession Plan Executive Briefing
The value of a business is based upon the perspective of the person valuing it and the reason for the value.
Maximum Value, also called Enterprise Value, is what most owners want to receive from sale to a third party.
Minimum Value, after applying a variety of legitimate valuation discounts, then called Lowest Defensible Value, is what most owners should choose to receive from Insiders for their ownership interest, which would not reflect the total value that they receive for sale of the business.
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Step 2: Identify Business & Personal Financial Resources
Succession Plan Executive Briefing
Step 3: Maximize and Protect Business Value
“From Good to Great.”
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Succession Plan Executive Briefing
1. Preserve value from needless taxation
2. Protect value from creditors
3. Maximize value through Value Drivers
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Step 3: Maximize and Protect Business Value
Three Components
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Benefits to Owner:
Reduce income taxes upon sale by 25 - 100% vs. no planning
Create ability to sell the business
Protect assets from potential business and personal creditors.
Increase business value and pre-tax earnings
Motivate and retain Key Employees
Step 3: Maximize and Protect Business Value
Succession Plan Executive Briefing
Step 3: Maximize and Protect Business Value
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Methods to Minimize Taxes
• Charitable Remainder Trusts (CRTs)
• Use of “lowest defensible value”
• Choice of entity: C versus S corporation
• Creation of multiple entities
• Employee Stock Ownership Plans (ESOPs)
• Qualified Plan Redesign
Succession Plan Executive BriefingOverview Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 ConclusionStep 1
“C” vs. “S” Asset Sale Comparison
Fair Market Value = $4,000,000
Basis of Assets = $1,000,000
Entity Status Corporate Tax Personal Tax Net Proceeds to Owner
“C” Corp $1,200,000 $550,000 $2,250,000
“S” Corp $0 $600,000 $3,400,000
Succession Plan Executive Briefing
Focus on before-tax earnings that reflect future income growth Develop operating systems that sustain before-tax earnings Document sustainability of before –tax earnings (EBITDA) Improve company performance measured by industry metrics Update facilities, equipment, and systems to state-of-the-art Pay down debt, manage inventories-recognize obsolete items Solidify and diversify customer base Implement strategies to grow the company Build a solid management team - incent team to perform.
Step 3: Maximize Value Through Value Drivers
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Succession Plan Executive Briefing
The Role of Key Employees Indispensable components of a valuable business are its top
employees.
Think about it – they are even more valuable than you are for purposes of creating value for your business.
Why? Because the more valuable you are to the business, the less value the business has when you leave it. So if you want to make your business more valuable, make yourself less valuable.
.
Step 3: Maximize and Protect Business Value
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Succession Plan Executive Briefing
Design of Incentive Plan
Increase profitability Increase business value Retain key employees Must contain a deferral – the retention of the key employee.
Step 3: Maximize and Protect Business Value
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Succession Plan Executive Briefing
Step 4: Sale to Third Parties
“The ideal path for many owners.”
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Succession Plan Executive Briefing
Benefits to Owner
Cash
Minimize financial risk of exit
Eliminate family succession issues
Quicker exit possible?
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Step 4: Sale to Third Parties
Succession Plan Executive Briefing
The primary factors in determining what a buyer is
willing to pay you for your business:
Future earnings before taxes that he/she expects to realize from the business (EBITDA) – most businesses are sold as a multiple of EBITDA.
The buyer wants to know the quality of your management team and whether they will remain when you leave.
The current and future state of your industry.
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Step 4: Sale to Third Parties
Succession Plan Executive Briefing
Maximum value is normally obtained when the business’s future looks the brightest and when market conditions are peaking, even though the owner may not be ready to sell.
Never state an asking price.
Sell through a competitive auctioning process involving multiple prospective buyers through business brokering.
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Step 4: Sale to Third Parties
Succession Plan Executive Briefing
Step 5: Sale to Insiders
“How to structure the transaction.”
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Succession Plan Executive Briefing
The Issues are Similar:
Taxes
Money: children, other owners, keyemployees have no money, so
most of the purchase must come from the future earnings of the company.
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Step 5: Sale to Insiders
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TAXES: Golf Unlimited, Inc.
Sale for MAXIMUM ValueDetermined by Your Appraiser
$1,000,000Cash Flow = $1,700,000
BUYER
$1,700,000-700,000
$1,000,000INCOME TAX
SELLER
$1,000,000-200,000
$ 800,000CAPITAL GAINS TAX
PAYMENT FOR BUSINESS
Conclusion: Few businesses can be successfully transferred when the IRS gets 50% or more of the available proceeds!
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Step 5: Sale to Insiders
So What’s the Answer?
Devise methods to maximize your income stream by minimizing taxation and preserve value from needless taxation.
Thus, you will need ordinarily to sell your ownership interest for the lowest (yes, lowest) defensible value. Then, obtain the income you need without subjecting the business net earnings to the double tax.
Succession Plan Executive BriefingOverview Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 ConclusionStep 1Step 1Overview Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 Conclusion
TAXES: Golf Unlimited, Inc.
Sale for MINIMUM ValueDetermined by Your AppraiserDiscounted Value = $300,000+ NQ Deferred Compensation
BUYER
$450,000-150,000
$300,000
Cash FlowIncome Tax
SELLER
$300,000 + 835,000 NQDC- 60,000 Tax – 275,000$240,000 + $560,000
PAYMENT FOR BUSINESS $800,000
Succession Plan Executive Briefing
Maximum Value
Step 1Overview Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 Conclusion
Comparison of Enterprise and Discounted Values
Sale for: $1,000,000
Requires:Cash Flow $1,700,000
Sale for: $300,000
Requires:
Cash Flow $450,000PlusDeductible business NQDC $835,000
Minimum Value
Required Cash Flow $1,700,000
Required Cash Flow $1, 285,000
How Valuation Methods Impact Cash Flow Requirements
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Step 5: Sale to Insiders
Additional Methods of Receiving Income:
If Real Estate is owned in another entity, lease payments of the highest defensible amount between that entity and the business (could be building as well as equipment)
Consulting Fees
Sub-S Distributions
Redesigned Qualified Plan Funding
Succession Plan Executive Briefing
Step 6: Business Continuation
“Making sure the business continues when the owner doesn’t.”
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The Continuation Agreement Controls the Transfer of Ownership when the Following Events Occur:
Death of an Owner
Permanent Incapacity (Total Disability) of an Owner
Retirement – you need cash to buy out an older owners
Termination of Employment
Bankruptcy
Step 6: Business Continuation
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The Continuation Agreement controls the Transfer of Ownership When the Following Events Occur:
Divorce – you or your children
Business Disputes Among Owners
When a triggering event occurs, parties may become adverse.
Step 6: Business Continuation
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Common Buy-Sell Agreement Problems
Valuation not reviewed regularly (or at all)
Value not clearly defined
Difference for “Enterprise Value” not addressed
Failure to cover all transfer events
No coordination of life insurance with value
Disability buy-sell coverage not addressed
Step 6: Business Continuation
Succession Plan Executive Briefing
Step 7: Personal Wealth & Estate Planning
“When the ‘slings and arrows’ of outrageous fortune befall you, fight back.” William Shakespeare (Hamlet)
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Succession Plan Executive Briefing
Benefits to Owners
Financial Security for Family
Treat Children Equitably, Not Equally
Address Estate Taxes
Complete New Estate Plan to Go with Exit Plan
Finalize Retirement Plan
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Step 7: Personal Wealth & Estate Planning
Step 7 Conclusion
Succession Plan Executive Briefing
There is only one way you, as an owner, can leave your business successfully – you must create a written Succession Plan as early as possible, revise it occasionally, and stick to the plan as long as you maintain your business.
Creating and implementing your Succession Plan can be the most important business and financial event in your life. Remember, you have only one chance to get it right!
Financial Professionals, like us, bring to the table knowledge and experience to help you create a written Succession Plan and help you get it right.
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Conclusion
Succession Plan Executive Briefing
A written Succession 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.
Ingredients of a Successful Sale
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