THERE MUST BE SOME KIND OF WAY OUT OF HERE! Presented by: R.A. Bobbi Hayes, CPA, CFE, CEPA Partner...

Business TransitionTHERE MUST BE SOME KIND OF WAY OUT OF HERE!

Presented by:

R.A. Bobbi Hayes, CPA, CFE, CEPAPartner with Accounting & Consulting Group, LLP

The Marketplace of Owners

Importance of Business Transition:

12 million Baby Boomers (born 1946-1964) own privately held businesses in the United States.

Their illiquid wealth within these businesses is estimated to be over $10 trillion.

70% of these businesses will change hands in the next ten years.

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The Marketplace of Owners

Importance of Business Transition:

250,000 Baby Boomers turn 65 every month.

Roughly 17% of baby boomers now report they are retired – up from 10% in 2010.

At age 66, 39% still working full time, at age 68, 32% still working full time

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Business Sizes in the United States Today

8,326 businesses

with 500-999 EEs

82,334 businesses with 100-499 EEs

508,249 businesses with 20-99 EEs

4,320,290 businesses with 1-19 EEs

17,646,062 Non-EE businesses

Source: VIP Forum analysis of the Survey of Consumer Finances, 2008

EE = Employee Equivalent

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Facts about Business in the U.S.

66% of all businesses with employees, nearly 4 million companies, are owned by baby boomers.

In 2013, 84% of all construction companies were owned by baby boomers (FMI).

M0st construction companies plan to transition internally (MBO, ESOP, or family).

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52% of owners do not have the management team to support them if they were to leave tomorrow.

17% expect to sell to a third party. Very few will be successful due to presence of an inadequate management team.

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37% expect to sell to employees. 24% expect to sell or gift to family. 17% expect to do a combination of

selling to both employees and family.

5% plan to just liquidate.

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Transition Planning is...

The process by which you plan an transition from your illiquid business.

Business owners need to monetize and protect the wealth that is trapped in these businesses.

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The Transfer Cycle

Sales of businesses occur in cycles

Ten Year Transfer Cycle

1980 1983 1988 19901990 1993 1998 20002000 2003 2008 2010

Estimated 2010 2013 20182020

Deal Recession(Buyer’s Market)

Deal Recession(Seller’s Market)

Almost Recession

(Neutral Market)

Source: Rob Slee

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Planning the Transition

60% of construction company owners have a formal plan in place to ensure continuity of operations in event of death. (FMI)

39% of construction company owners have a formal plan in place to transition themselves out of management the business. (FMI)

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Planning the Transition

The average business owner spends 80 hours preparing a business plan and only 6 hours preparing for their transition. This is not a way to maximize value of

your biggest monetary investment (generally)!

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Transitioning Business Owners

Privately-Held businesses typically are: The largest asset/investment that an

owner or family will possess. The primary source of income for an

owner and family. Vehicles for paying bills as well as

accumulating and transferring wealth. The source of pride/legacy.

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Transitioning Business Owners

So, how will millions of Business Owners: Convert their illiquid, primary asset to cash? Replace the income from the business? Transfer their business wealth to the next

generation? Protect their legacy? Remove themselves

from personal liability

and bonding?

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Planning the Process

Transitioning a business is a process, not an event.

Is only an event if 3 D’s (death, disability, divorce).

Needs a written plan.

To build an transition strategy plan you need information and a perspective on what you are trying to accomplish.

Ongoing monitoring.

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What is an Transition Plan

A comprehensive road map to successfully transition a private business.

It asks and answers all of the issues concerning: Your business (value, value preservation, value

enhancement). Your personal needs (legacy). Your financial position and needs. Legal issues (trust, gift, etc.). Addresses tax questions involved in selling a

privately owned business OR gifting to heirs.15

Owners Want a Transfer that Protects Their Wealth

It is assumed that most of an owner’s wealth is tied to their business

Another safe assumption is that an owner would like to protect that wealth through diversification

Key QuestionThink about what percentage of your total net worth

is tied up in your privately-held business? (if you know the value of your business)

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Diversify to Retire

Private Business Owner Stock is usually a concentrated position for that owner. It can be more than 80% of owner’s net

worth.

Owners needs DIVERSIFICATION of assets.

Greater diversification means spreading risk over many holdings.

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Diversify to Retire

An owner might be maxing out their 401k and IRA, but the rest of their cash usually goes to supporting their lifestyle and the company.

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Transitioning – A Six Step Process

Setting Transition Goals1.

Financial Readiness2.

Identify Type of Transitioning Owner You Most Resemble3.

Learn & Choose Your Transition Option4.

Understand the Value of the Option You Choose5.

Execute Your Transition Strategy Plan to Reach Your

Goals and Protect Your Wealth6.

Mental Readiness

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Step 1: Setting Transition Goals

The Personal Assessment of the business owner’s readiness for an

transitionWhat do you want to achieve?1.

Are you Financially Ready for the transition?2.

Are you Mentally Ready for the transition? 3.

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Setting Transition Goals

The transitioning owner’s goals for their transition will be the driver behind an transition planning engagement

What would you most like to achieve with the transition from your business?

Legacy to Heirs

Reward Loyal EE’s/Employee Transfer (ESOP)

Cash Out & Continue to Work

Cash Out and Leave

Fund Retirement Lifestyle

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Business owners must work with their team of advisors to put together a WRITTEN plan that: Identifies and prioritizes financial and

non-financial goals. Establishes a business, professional and

personal strategy to achieve the goals. Sets a time frame (3-5 years generally). Lists post-transition activities.

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Multidisciplinary Approach – The Team

OwnerTransition Planning Advisor -

Quarterback

CPA

Wealth Managemen

t Advisor

Attorney

Family Business

Coach

M&A / Valuation

Insurance Advisor

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Transition planning involves the integration of business-level planning and reflects the owner’s circumstances and needs with financial, professional and personal goals.

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Mental Readiness

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Financial Readiness

Consider - What amount of investable assets in your account will be sufficient to satisfy your post-transition lifestyle?

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The transitioning owner’s financial readiness for an transition will be a strong determinant of what options are realistically available for their transition

Financial Readiness

Relying on sale proceeds to finance retirement = lower financial readiness

Don’t need to rely on sale monies = higher financial readiness

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Mental Readiness

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Mental Readiness

How you, the owner, view your transition is critical.

Too many business owners are emotionally attached to their businesses.

When truly seen for what your business is (which is an investment) you can make better financial decisions.

75% of business owners profoundly regretted selling twelve months later.

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Mental Readiness

Are you ready to leave? How involved are you in the day-to-day

running of the business? Do you have a plan as to how you will

spend leisure time away from the business?

Are the thoughts and habits of running a business so routine that you won’t know what to do after the transition?

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Mental Readiness

Are you ready to leave? Do you view the business as providing a

good return on invested capital, or more interested in the lifestyle that the business provides?

Will you be able to think clearly throughout the transition process so that the decisions you make are based on objective criteria instead of the subjective ways in which you feel about the transition?

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Mental Readiness

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Types of Existing Owner

Financially Ready and Ready to Go More transition options, lower daily

involvement in business, value of business not large % of assets.

Financially Ready but Chooses to Work More transition options, typically daily

involvement in business, value of business not large % of assets.

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Types of Existing Owner

Stay and Grow Less transition options, daily involvement in

business, value of business large % of assets, sees value in growing business.

Get Me Out! Less transition options, typically daily

involvement in business, value of business large % of assets, not prepared for financial transition, but is ready nonetheless (BURNED OUT!).

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The Transition Quadrant

Financial Readiness

Mental Readiness

High

Low

Financially Ready but choose to

work

Stay & Grow

Financially Ready & Ready to Go

Get me out for whatever you can

High

Low

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Mental Readiness

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Six Primary Transition Options

1. Sale of the Business to third party

2. Private Equity Group (PEG) Recapitalizations

3. Employee Stock Ownership Plans (ESOPs)

4. Management Buyouts (MBO)

5. Gifting Programs

6. Shut Down – Orderly Liquidation of Assets

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Transition Options & Types of Owners

Financial Readiness

Mental Readiness

The primary transition options fit into our transition Quadrant Chart

MBO, Gift, ESOP

PEG Recap., ESOP, Grow Bus., Increase Savings

Get me out for whatever you can

Gift, Charity, ESOP, Sell

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What are the Right Transition Options for Owners

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Internal vs. External Transfers

A simpler way to view these transfer options is to see them as:

Employee Stock

Ownership Plans

Internal Transfers External Transfers

Management Buyout

Gifting

or

Sale to an Outside Buyer

Private Equity Group

Recapitalization

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Transition via Sale to a Outside Buyer

Owners may choose to transition their business via a sale to an industry buyer, competitor.

This type of transitioning owner is generally aware that this is the way to get the highest price, however most owners have unrealistic expectations of values that will be extremely difficult to meet.

Sale to an Outside Buyer

Synergy Value

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Transition via Sale to a Outside Buyer

Owner gets the highest value. But likely loses their job.

They give up strategic & financial control of business if they do stay on as part of deal.

No future value is available – no income stream from business.

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Transition via Recapitalization

Owners will not receive the highest value

Rarely an option for construction contractors.

Investment value includes a multiple of earnings, no synergies paid for

If some equity is kept, could get second bite of apple later when PEG transitionsRecapitalizati

on

Investment Value

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Transition via ESOP

An ESOP allows for: The creation of a buyer for the

company’s shares. Diversification for the owner, maintain

control. Increase Company cash flow (tax

deduction for stock purchase). Benefit to employees.

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Transition via ESOP

Owner receives lower value.

They do not sell control or bring in new partners.

Owner keeps their job, salary, perks (reasonable).

Owner participates in future value of business.

A properly installed ESOP can boost morale of employees.

ESOPFair Market

Value

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Transition via Management Buyout

Owner may choose to transition by selling the company to the management team.

A High Level of financial readiness is recommended due to the inherent uncertainties involved with converting employees into owners.Management

BuyoutInvestment

Value

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Special issues with management buyouts: The employees don’t have the money to buy your

business – current owner holds a note.

The managers do not take risks like you.

Your relationship with the managers changes from employer/employee to partners.

You are negotiating with the people who worked for you.

The business will likely need to serve as collateral for the transition to function properly.

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MBO benefits are: The managers know the business, so value is

maintained through continuity.

There is an affinity towards this group who helped build the wealth in the company.

A controlled transition that can occur over many years, providing flexibility to deal with structure and taxes.

You can maintain control.

A management buyout does not require a third party.

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Transition via a Gifting Program

You may choose to make gifts of stock to family members or others

A High Level of financial readiness is recommended due to the fact that the owner is gifting away assets

Larger estate planning techniques are likely required

Intra-family transfers can have lots of dramaGifting

Program

Fair Market Value

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Mental Readiness

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Range of Values

Value is determined by Transition Channel

Employee Stock Ownership

Plans

Internal Transfer External Transfer

Management Buyout

Gifting

Private Equity Group

RecapitalizationSale to an Outside Buyer

Fair Market Value

Discounts May Apply

“Market Value”

Investment Value

Synergy Value

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Range of Values

Most construction owners (48%) expect to sell for book value (shareholders’ equity).

40% of construction company owners expect to sell for a multiple of earnings cash flow.

Owners most often think “4 to 5 times.” Very few deals are made at that level.

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Mental Readiness

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Transition Planning Report (Typical)

1. EXECUTIVE SUMMARY

2. YOUR GOALS AND OBJECTIVES

3. PERSONAL CONTINGENCY PLAN

4. YOUR BUSINESS: A BASELINE VALUATION

5. VALUE FACTOR ANALYSIS

6. VALUE ENHANCEMENT OPPORTUNITIES

7. TRANSITION OPTIONS AND CONSIDERATIONS

8. TAX ANALYSIS

9. RECOMMENDATIONS

10.ACTION PLANS

11.PROFESSIONAL ADVISORS

12.GLOSSARY

13.EXHIBIT A: PRESALE DUE DILIGENCE CHECK LIST

14.EXHIBIT B: LIMITED SCOPE BUSINESS VALUATION REPORT

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Thank You

Comments and suggestions are appreciated!

R.A. Bobbi Hayes, CPA, CEPA, CCIFP, CFE, CFF

PartnerAccounting & Consulting Group, LLP2700 San Pedro [email protected]

Alamogordo ¤ Albuquerque ¤ Carlsbad ¤ Clovis ¤ El Paso ¤ Hobbs ¤ Lubbock ¤ Roswell

THERE MUST BE SOME KIND OF WAY OUT OF HERE! Presented by: R.A. Bobbi Hayes, CPA, CFE, CEPA Partner...

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Transcript of THERE MUST BE SOME KIND OF WAY OUT OF HERE! Presented by: R.A. Bobbi Hayes, CPA, CFE, CEPA Partner...