Ownership Transition

Overview of 4 Ownership Models:3rd Party, Management Buyout, ESOP and Family

Overview

• Identify Why Planning For Ownership Transition Is Important

• Identify Transition Options Available, And Discuss The Pros And Cons Of Each

Ownership Transition Process

Understanding That Options Are Available

Identifying Appropriate Transition Options

Evaluating Those Options

Selecting The Right

Option

Why Plan For Ownership Transition

• To Determine Whose Interests Need To Be Considered

• Anticipate Liquidity Issues Facing Owners

• Reduce Estate Tax Liability• Impacts Cash Flow Available For

Retirement• Impacts Net Amount Available For Heirs

Why Plan For Ownership Transition

• Impacts How You Organize And Operate Your Company – Are You Too Busy Tending To Day To Day Business

• Proper Planning Will Save Time And Money During A Business Succession Event

• Issues Apply To All Types Of Business Succession Transactions

Mistakes To Avoid

• Put Off Or Avoid Decisions (Ostrich Approach)

• Assume Insurance Will Take Care Of Everything

• Assume All Companies Are Saleable• Pre-Conceived Ideas Without

Considering All Possible Options

• Transferring Ownership To The Wrong People

When To Start Planning

• How Early Should You Begin Thinking About Transition

• Is Now The Right Time To Transfer Ownership

• Planning Saves Taxes

Exit Strategy Considerations

• Market Conditions• Maximization Of Value• Sentimental Attachment To The

Company, Or To The Employee Base

• Potential For A Family Member To Manage The Company

• Are There Family Issues That Need To Be Considered

Why Valuation Is Important

• Critical Component Of Planning Process• Provides Business Owners A Reality

Check• Helps Identify Value Drivers And Value

Detractors

Internal Transition Options

• Transition Within The Family• Management Buyout• Employee Stock Ownership Plan• Hire A CEO To Run The Company

External Transition Options

• Third Party Sale• Recapitalization• Sale of Minority Interest• Initial Public Offering

Third Party Sale

• Advantages– Capture Real Value Of Company– Able To Exit The Business Cleanly– Create Career Opportunity For Employees

• Disadvantages– Lengthy Process– Due Diligence And Negotiation Process Can Be

Stressful– Potential Post-Transaction Contingencies

Third Party Sale

• Financial Buyers– Individual Investor– Private Equity Group

• Strategic Buyers– Related Industry/Sector– Competitor– Portfolio Company Owned By A Private Equity

Group

Third Party Sale – Strategic Buyers

• Pros– Synergies Available– High Multiples Available– Do Not Always Need Management Talent– Can Deliver Requirements For Growth (i.e.

Capital, Markets, Technology)– Will Often Entertain Earnouts– Provides Career Path For Management And

Employees

Third Party Sale – Strategic Buyers

• Cons– Slow To Do A Transaction– Integration Can Be Painful– Do No Expect To Stay Long– Upside In Deal May Be Tied To The Overall

Acquirer– Process May Be Painful– Shares In Acquirer May Be Restricted– Employees And Business Can Be Lost

Third Party Sale – Financial Buyers

• Pros– Can Close Deal Quickly– Informal But Quick Responses– Opportunity To Stay Involved And Have Upside– Management And Employees Can Get Options– Business Will Retain Its Identity

Third Party Sale – Financial Buyers

• Cons– Want A High Rate Of Return – Results In A Lower

Price– Very Driven – Slow Life Gone– Require Exit Strategy– Possible Loss Of Control– Non Performing Friends And Family Employed

Are Threatened

Third Party Sale

• Deal Structure– Merger– Stock Sale– Asset Sale

• Corporate Status– C Corporation– S Corporation

Third Party Sale - Expectations

• Price• Terms• Structure• Timetable• Fees

Third Party Sale - Consideration

• Forms Of Consideration– Stock– Cash– Notes– Combination

• Buyer Protections– Earnouts– Holdbacks– Escrows– Indemnifications

Family Transition

• Advantages– Keeps Business In The Family– Parents Can Be The Banker

• Disadvantages– Be Sure Children Can Run The Company– IRS Issues

Family Transition• Gifting Or Bequests– Family Limited Partnerships (FLPs)– Limited Liability Companies (LLCs)– Closely Held Stock (Voting, Non-Voting)

• Sale Of Assets Or Stock• Transfer To Family Members– Fair Market Value And Terms– Adequate Disclosure– Valuation Discounts

ESOPs• Advantages– Can Be Done In Stages (Less Leverage)– Transition Of Financial And Management Control

Can Be Made Independently– Draws On Pre-Tax Cash Flow– Capital Gains Taxes Deferral

• Disadvantages– Perceived Complexity– QRP Restrictions

ESOPs – Why Sell

• Begin The Diversification Process• Reward Employees For Their Efforts• Philosophical Belief In Employee

Ownership• Take Advantage Of The Tax Benefits• Excellent Opportunity For Estate

Planning After Transaction Is Completed

ESOPs

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ESOPs

• Benefits To Shareholders– Ready Market To Sell All Or A Portion Of Their

Stock (Always A Stock Deal)– Tax-Free Rollover Of Sales Proceeds– Maintain Control Of Corporation, If Desired

ESOPs

• Benefits To The Company– Increases Productivity– Repay Principal Portion Of Debt With Pre-Tax

Dollars– Prepay Loan With Tax Deductible Dividends– Increases Cash Flow– Exclusion Of Federal Income Taxes (S

Corporations Only) – Keeps Company Rooted In The Community

ESOPs

• Benefits To Employees– Own A Piece Of The Company And Share In The

Company’s Growth At No Cost To Them– Improves Morale– Account Balances Grow Tax Free– Can Diversify Accounts, If Desired

Management Buyout

• Advantages– Uses Corporate Assets And Earnings To Finance

The Transaction– Diversification For Shareholders– Continuity Of Management

• Disadvantages– Balance Sheet Stress– Owner Will Not Receive Highest Price– Management Will Need To Bring In Equity

Management Buyout

• Description Of Ideal Management Buyout Candidate Company– Second Line Management Team In Place– Asset Intensive– Minimal Debt

Getting Started

• Form An Advisory Team• Conduct An Ownership Transition

Analysis