Exit Strategy Planning Educational

EXIT STRATEGY PLANNING
Achieving optimum value for your business
05/23/16
PACE CAPITAL RESOURCES, LLC
MARKET NEED
Based on a 2005 survey by PriceWaterhouseCoopers:

More than 4.5 million business owners are 50 years old or older.
67% of business owners of firms with revenues from $5 million to $150
million plan to leave the business within the 10 years.
More than 75% of the owners have not done much planning for what
will probably be the single most significant financial event of their lives.
M&A Marketplace:
Success rate is 1 in 4 actually sells(1)
Success rate for businesses with sales of $10 million 1 in 3 (1)
Success rate for businesses with sales above $10 million 50-50 (1)
(1) 2005 Business Reference Guide by Tom West
05/23/16
EXIT ALTERNATIVES
Sell to a Strategic Buyer 100% liquidity.
Sell to a Financial Buyer up to 100% liquidity.
Sell to Management/Family up to 100% liquidity.
Recap harvest a majority of your net worth and retain minority ownership
for a second bite of the apple but still maintain operational control of the
business.
ESOP up to 100% liquidity selling the business to the employees.
IPO initial public offering.
Liquidate.
Is your company positioned to consider multiple exit alternatives or are your

alternatives limited?
05/23/16
ISSUES LIMITING EXIT ALTERNATIVES AND VALUE
Is there an heir apparent to run the business in the future?
Do you have the management depth to take the business to the next level?
Does your largest customer account for less than 20% of sales?
Do you have multiple suppliers for product or raw materials?
Do you have systems and processes to properly manage the business in the
future and provide the level of service expected from your customer base?
Does the business have opportunities for growth through geographic

expansion, product line extensions or new channels of distribution?
Do you have excess capacity to support future growth?
A NO to any of these questions may limit your alternatives and depress the
value of your business. Proper Exit Strategy Planning addressing these
and other issues will produce the desired results positioning the business as
an attractive investment from multiple sources.
05/23/16
THE ISSUES
Exit Strategy Planning involves answering "Yes" to seven questions:
Do you know your exact retirement goals and what it will take, in cash, to
reach them?
Do you know how much your business is worth today, in cash?
Do you know to position your business to maximize enterprise value?
Do you know how to sell your business to a third party and pay the least
possible taxes?
Do you know how to transfer your business to family members, co-owners,

or employees while paying the least possible taxes and enjoying maximum
financial security?
Do you have a continuity plan for your business if the unexpected happens
to you?
Do you have a plan to secure financial independence for your family if the
unexpected happens to you?
05/23/16
INGREDIANTS OF A SUCCESSFUL EXIT
A written Exit Strategy Plan based on an owners objectives.
Designed and implemented by an experienced team of advisors.
Cash flow, maximizing value
Management Team capable of running the business.
Time.
05/23/16
EXIT PLAN COMPONENTS
05/23/16
SEVEN STEP PROCESS
Step 1 Indentify Exit Objectives
Step 2 Quantify Business and Personal Financial Resources
Step 3 Maximizing and Protecting Business Value
Step 4 Ownership Transfer - Selling to Third Parties
Step 5 Ownership Transfer - Selling to Insiders
Step 6 Business Continuity
Step 7 Personal Wealth and Estate Planning
05/23/16
1. IDENTIFY EXIT OBJECTIVES

The process begins with answering three questions:
How much longer does an owner want to work in the business before
retiring or moving on?
What annual after-tax income does the owner want during retirement?
To whom does the owner want to sell the business?
Benefits to the Owner:
Clarifies priorities.
Facilitates progress by indentifying a desired outcome.
Controls and defines the Exit Strategy Planning process.
05/23/16

Additional Objectives:
Shift wealth to children.
Provide charitable gifts or transfers.
Reward employees.
Receive full value for the business.
Take business to the next level.
05/23/16
10

Advisory Team:
Who is the advisory team?

Attorney Estate, Tax, Corporate
Wealth Management Advisor, Financial Planner
CPA
Insurance Advisor
Valuation Specialist
Exit Strategy Planning Specialist
No one professional has all the answers.
Diverse skills and talents are necessary.
Team approach minimizes time and cost.
05/23/16
11
2. QUANTIFY BUSINESS AND PERSONAL FINANCIAL RESOURCES
Perform a third party valuation of the business.
Perform a needs assessment to determine the amount of after-tax dollars

needed to lead the desired lifestyle after exiting the business.
Do the combined business and personal financial resources meet your

objectives?
05/23/16
12
3. MAXIMIZING AND PROTECTING BUSINESS VALUE

Increase enterprise value by creating and enhancing the value drivers of the
business.
Tax strategy -reduce income taxes upon sale of business.
Protect assets from potential business and personal creditors.
Motivate and keep key employees.
Create ability to sell the business.
05/23/16
13

Value Drivers:
Proven management team.
Reliable operating systems and processes.
Effective financial controls.
Realistic growth strategy.
Product differentiation.
Proprietary technology.
Market defensibility.
Established and diversified customer base.
Established and diversified vendor base.
05/23/16
14

Process:
Assess industry structure, the balance of power of your business (Supplier

Power, Buyer Power, Competitive Rivalry, Threat of Substitution and Threat
of New Entry).
Perform a SWOT (Strengths, Weaknesses, Opportunities and Threats)

analysis of the business.
Analyze competitive position, advantages and value drivers of the business.
Review operating systems and processes.
Assess human resources, asset and capital requirements.
Assess value creation alternatives.
Develop a strategic plan to enhance the value drivers of the business and
address weaknesses and threats; positioning the business to achieve
optimum value on an after tax basis.
05/23/16
15
FIVE FORCES BALANCE OF POWER

Threat of New Entry:
Competitive Rivalry:
Threat
Cost advantages
Number of Competitors
of New
Economies of scale
Quality differences
Entry
Time and cost of entry
Customer
loyalty
Barriers to entry
Switching costs
Supplier Power
Competitive
Rivalry
Buyer Power
Supply Power:
Number of suppliers
Buyer Power:
Size
Number of customers
Cost of Changing
Price sensitivity
Ability to substitute
Threat of
Threat of Substitute:
Cost of Change
Performance
05/23/16
Substitute
16
SWOT ANALYSIS
Strengths:
Weaknesses:
What do others see as your strengths? What factors lose you sales?
What do you do well?
What could you improve?
What advantages do you have?
Where do you have fewer resources?
What unique resources do you have?
What do others see as weaknesses?
Opportunities:
Threats:
What opportunities are open to you?
What trends can harm you?
Take advantage of current trends?
What is your competition doing?
Can you turn your strengths into

opportunities?
What threats do your weaknesses

expose you to?
05/23/16
17

Possible recommendations:
Management Team Development Plan.
Profit margin improvements (outsourcing processes, procurement costs,

pricing, production improvements, cost reductions, acquisitions).
Key Employee Incentive Compensation Plan (stock bonus, stock

appreciation rights, non-qualified compensation plan, cash bonus).
Separation of business assets from business operations.
Non- solicitation, Non-compete agreements.
Wealth transfer to children during owners lifetime.
05/23/16
18
4. OWNERSHIP TRANSFER SELLING TO THIRD PARTIES

Benefits to Owner:
Cash at closing.
Eliminate or reduce financial risk.
No family succession issues.
Speed of exit.
05/23/16
19
4. OWNERSHIP TRANSFER SELLING TO THIRD PARTIES

Considerations:
Ability to sell and business value determined by:

Intrinsic Value: the value drivers
Extrinsic Value: the value the market places on the business
Effectiveness of the sale process
M&A Marketplace:
Success rate is one out of four actually sells(1)
Success rate for businesses with sales of $10 million one out of three (1)
Success rate for businesses with sales above $10 million 50-50 (1)
Positioning the business for sale, pre-sale due diligence and tax
planning.
(1) 2005 Business Reference Guide by Tom West
05/23/16
20
5. OWNERSHIP TRANSFER - SELLING TO INSIDERS

Achieves exit objective of:

Selling to key employee group
Transferring to a relative
Motivates and retains key employees.
Planning reduces risk and increases amount of cash received by

minimizing the tax consequences for both the seller and buyer.
05/23/16
21

Sale to a Third Party for Cash:
Fair Market Value = $10,000,000
Cash Flow
= $2,500,000
Buyer
Owner
Cash for purchase
$8,000,000 Net of Tax
05/23/16
22

Sale to Employee for Installment Note:
Fair Market Value = $10,000,000
Cash Flow
= $2,500,000
Employee
Cash flow from business
$2,500,000 - $1,500,000 (net
of taxes)
Cash to Owner $1,200,000
(net of taxes)
Owner
$8,000,000 Net of Tax
Timing: 7 9 years
05/23/16
23

Transfer to Employee Phase 1:
Fair Market Value = $5,000,000 - $10,000,000
Cash Flow
= $2,500,000
Employee
Purchased 40% for $2,000,000
($1,000,000 of cash flow per
year to employee)
Owner
$480,000 Net of Tax
$1,440,000 After 3 Years
Owner
Cash flow from business
$1,500,000
Owner
$900,000 Net of Tax
05/23/16
24

Transfer to Employee Phase 2:
Fair Market Value = $5,000,000 - $10,000,000
Cash Flow
= $2,500,000
Owner
$4,800,000 Net of Tax
Employee
Purchased 60% for $6,000,000
Owner
Timing: 3 years
05/23/16
25

Possible recommendations:
Sale of ownership interest (cash, note or bank financing).
Bonus or gift of ownership interest.
Grantor Retained Annuity Trust (GRAT).
Non-qualified deferred compensation plan (409a).
Buy back agreement for minority owner.
05/23/16
26
FAMILY SUCCESSION ISSUES
Only one third of family businesses are passed to the second generation
Only 10% are passed to the third generation
Reasons:
Children may not get along
Different career goals
Inability for parents to achieve financial goals
Unable to run the business
05/23/16
27
INGREDIENTS OF SUCCESSFUL TRANSFER
A written plan
Defines financial independence
Defines fairness in distribution
Timeline
Only one child becomes sole successor or at least control
Business transition plan is fair to all
Parents achieve financial security independent of the business
Business active child demonstrates the ability and willingness to run the
business
There is a backup Plan B
05/23/16
28
INGREDIENTS OF SUCCESSFUL TRANSFER

Reasons for backup Plan B:
Value increases to a point a buyout is financially too difficult
Increase in value exceeds value of other assets fairness
Business becomes too complex or sophisticated for one child
Child losses interest or becomes ill
05/23/16
29
6. BUSINESS CONTINUITY PLANNING

Objectives can still be achieved if you do not survive your exit.
Retains ownership and control of business if co-owners depart.
Can force non-contributing owners to leave the business.
Provides consistency between lifetime and death objectives.
Ensures survival of the business for the benefit of others by:

Addressing continuity of ownership
Addressing the potential loss of financial resources
Addressing loss of key talent, customers and vendors
05/23/16
30
6. BUSINESS CONTINUITY PLANNING

Possible Recommendations:
Review and update continuity guidelines.
Review and update Buy-Sell (Shareholder) Agreement

Valuation
Funding mechanism
Address voluntary and involuntary termination
Insurance for continuity planning.
Stay bonus plan.
Plan for financial independence of the business.
05/23/16
31
7. PERSONAL WEALTH AND ESTATE PLANNING

Preserve wealth, minimize taxes using both lifetime and death planning
tools.
Coordinates and integrates lifetime exit objectives with the estate plan.
In effect, estate planning becomes part of the business planning.
05/23/16
32
7. PERSONAL WEALTH AND ESTATE PLANNING

Possible Recommendations:
Personal asset protection planning.
Personal and family insurance.
Transferring of specific non-business assets.
Personal wealth management plan.
05/23/16
33
REALITY
Eventually every owner will exit their business voluntarily or

otherwise. Proper Exit Strategy Planning will enable you to:
transition under your time frame
maximize the after-tax value of your business
ensure continuity in case of an unexpected event
assure financial security for you and your family
05/23/16
34

Exit Strategy Planning Educational

Transféré par

Informations du document

Description originale:

Titre original

Copyright

Formats disponibles

Partager ce document

Partager ou intégrer le document

Options de partage

Avez-vous trouvé ce document utile ?

Ce contenu est-il inapproprié ?

Droits d'auteur :

Formats disponibles

Exit Strategy Planning Educational

Transféré par

Droits d'auteur :

Formats disponibles

EXIT STRATEGY PLANNING

Achieving optimum value for your business

PACE CAPITAL RESOURCES, LLC

Based on a 2005 survey by PriceWaterhouseCoopers:

(1) 2005 Business Reference Guide by Tom West

PACE CAPITAL RESOURCES, LLC

Sell to a Strategic Buyer 100% liquidity.

Sell to a Financial Buyer up to 100% liquidity.

Sell to Management/Family up to 100% liquidity.

ESOP up to 100% liquidity selling the business to the employees.

IPO initial public offering.

Is your company positioned to consider multiple exit alternatives or are your

PACE CAPITAL RESOURCES, LLC

ISSUES LIMITING EXIT ALTERNATIVES AND VALUE

Is there an heir apparent to run the business in the future?

Do you have multiple suppliers for product or raw materials?

Does the business have opportunities for growth through geographic

Do you have excess capacity to support future growth?

PACE CAPITAL RESOURCES, LLC

Do you know how much your business is worth today, in cash?

Do you know to position your business to maximize enterprise value?

Do you know how to transfer your business to family members, co-owners,

PACE CAPITAL RESOURCES, LLC

INGREDIANTS OF A SUCCESSFUL EXIT

A written Exit Strategy Plan based on an owners objectives.

Designed and implemented by an experienced team of advisors.

Cash flow, maximizing value

Management Team capable of running the business.

PACE CAPITAL RESOURCES, LLC

EXIT PLAN COMPONENTS

PACE CAPITAL RESOURCES, LLC

SEVEN STEP PROCESS

Step 1 Indentify Exit Objectives

Step 2 Quantify Business and Personal Financial Resources

Step 3 Maximizing and Protecting Business Value

Step 4 Ownership Transfer - Selling to Third Parties

Step 5 Ownership Transfer - Selling to Insiders

Step 6 Business Continuity

Step 7 Personal Wealth and Estate Planning

PACE CAPITAL RESOURCES, LLC

1. IDENTIFY EXIT OBJECTIVES

To whom does the owner want to sell the business?

Benefits to the Owner:

Facilitates progress by indentifying a desired outcome.

Controls and defines the Exit Strategy Planning process.

PACE CAPITAL RESOURCES, LLC

1. IDENTIFY EXIT OBJECTIVES

Shift wealth to children.

Provide charitable gifts or transfers.

Receive full value for the business.

Take business to the next level.

PACE CAPITAL RESOURCES, LLC

1. IDENTIFY EXIT OBJECTIVES

Who is the advisory team?

PACE CAPITAL RESOURCES, LLC

2. QUANTIFY BUSINESS AND PERSONAL FINANCIAL RESOURCES

Perform a third party valuation of the business.

Perform a needs assessment to determine the amount of after-tax dollars

Do the combined business and personal financial resources meet your

PACE CAPITAL RESOURCES, LLC

3. MAXIMIZING AND PROTECTING BUSINESS VALUE

Tax strategy -reduce income taxes upon sale of business.