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“The advice you need for the life you want”
MEMBER FDIC EQUAL HOUSING LENDER
Business Succession Planning
“Where do I start?”
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Introductions
Jim Reynolds, CExP™VP Business BankingBlackhawk [email protected]
Steve DouglasDirectorPorteBrown Accountants & Advisors
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Today’s Presenters
Timothy J. LeakePartnerHinshaw & Culbertson LLP
Henry Kaskov, ASAPresidentKaskov Valuations, Inc.
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Steve DouglasDirectorPorteBrown Accountants & Advisors
Accounting
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Why Do I Need a Transition or Exit Plan?
1. Most important financial transaction2. Complex3. Financial security4. Family, key management, employees5. Manage risk6. Want to achieve financial, other goals
A Team of Advisors is needed to handle all of the potential components of a successful plan
You Can’t Do It Alone!
Estate & Gift Tax
Planning
Retirement
Planning
Governance
Financial PlanningFamily Dynamics
Business Planning
& Strategy
Leadership &
Management Succession
Talent Management
Income Tax PlanningCompensation
Strategy & Design
Life Insurance Planning
Exit Planning Process/Framework
Financial
Departure Date
Successor
Identify the Owner’s Exit Objectives
Quantify Business & Personal Resources
•After-tax income / cash flows to retire
• Business valuation
Maximizing and Protecting Value
•Value drivers
•Minimize income tax impact
Most Common Transition Options
Sales or Transfer to Insiders
• Family
• Key employee(s)
• ESOP (Employee Stock Ownership Plan)
Third-Party
• Competitor
• Private Equity
• Maximize Value
• Minimize Risk
• Stay in Control
Three Main Value Propositions
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Henry Kaskov, ASAPresidentKaskov Valuations, Inc.
Valuations
Why Do I Need a Business Valuation?
Succession Planning• Understand the Fair Market Value in anticipation of a future exit
• Buying/Selling ownership interest to existing management, family, or a third party
• Financial & Retirement Planning
Estate & Gift Tax Reporting• Transferring ownership interest to the next generation
• Valuation is typically required by the IRS upon a gift or death
• Discount Studies for minority (<50%) interest in a business
Litigation• Divorce
• Shareholder / Partner Dispute
• Damages Analysis: Lost Profits / Lost Business Value
Business Valuation Process
Best if done several years prior to business exit• Typically results in best planning and positioning for the owners and the company
• Allows for time to make changes/improvements to increase value before exit
• Bring in consultants & experts to position the company for sale
Aspects of a Business Valuation• Analyze Financial Statements, Tax Returns, Operating Metrics, Etc.
• Review Shareholder / Operating / Partnership Agreements, Contracts, Leases
• Management Interview and Site Visit
• Industry, Market, Competition, Economic, & Valuation Analysis
• Duration: Approximately 1 month
• Cost: Depends on Scope
Scopes of Business Valuation
Full Appraisal• Unambiguous Opinion of Value utilizing all applicable
valuation approaches and a full due diligence analysis• Used in Gift and Estate Tax Reporting, Lending, Litigation
Limited Appraisal• Estimate of Value utilizing applicable valuation approaches
and a limited due diligence analysis• Used for informational & internal planning purposes
when a full appraisal may not be required
Calculations / Consulting• Preliminary Approximation of Value utilizing very limited
approaches & due diligence• ‘Rough estimate’ for initial planning and consulting purposes
Business Valuation Approaches
Asset Approach• Net Asset Value calculated by adjusting the company’s assets
& liabilities to market values
• Primarily used for asset-holding and asset-heavy companies
Income Approach• Future company profits are converted into present value that
reflect the sum of all future economic inflows
• Company profits are forecasted and discounted based on the company’s risk/reward profile
Market Approach• Value of a company based on sales of similar businesses in the
marketplace
• Utilize multiples of revenue, profit, cash flow, seller’s discretionary earnings, etc.
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Timothy J. LeakePartnerHinshaw & Culbertson LLP
Law
“Counselor” Role
The advisor needs to understand:• The type of business involved
• The family dynamics
• The value of the business
• Help the business owners understand the magnitude of the project
• Break down decisions to a manageable amount at any one time
• Need to have several discussions and planning sessions to open a dialogue
• There will be homework for the business owners to make meetings productive
• The key is continuity for the business!
Without Competent Successors, There is No Succession Plan
• What does the business owner want to do?
• What training does the successor need?
• What mentoring does the successor desire?
• What leadership style is necessary to succeed in the corporate culture?
Proper succession planning takes time…
Why Does Succession Planning Fail?
• Lack of communication and trust within the family around the group-decision making and governance
• Unprepared heirs
• Failure in financial planning, taxes, and investments
Most of the time, it isn't because of faulty documents
• But that doesn't mean we should pat ourselves on the back…
Business Succession Planning Approaches
Do Nothing
• At a minimum, write down notes to survivors!
Sell
• Develop a buy/sell agreement
• Develop employee retention plan
• Develop a liquidation plan
Transfer to Subsequent Generation
• Develop roles and responsibilities
• Development compensation plan
• Develop new shareholder agreement and buy/sell provisions
Techniques
Each succession plan has its own unique wrinkles and flashpoints
There are numerous techniques available to transition a business
Let’s focus on some issues and considerations to keep in mind
Documentation…Documentation…Documentation
• Corporate documents• Bylaws/Operating Agreement
• Buy/Sell Agreement
• Shareholder Agreement for management provisions
• Employment arrangements
• Board of Directors
• Contingency plans
• Ownership Information (Is title where it is supposed to be?)
• Trusts
• Partnerships/Limited Liability Companies
• Who is “next in line” to manage the assets
• Transfer Documentation• Purchase/Sale Agreements
• ESOP
• Estate planning documentation (gifting, Wills, Trusts)
Planning Issues to Consider
• Funding issues too!
• Bank loan documentation
Should some of the growth be transferred to
the next generation now?
How will a business interest be held in the short-term
and in the long-term?
Are there corporate agreements affecting the
estate planning documents?
• Gift
• Estate
• Income
What about taxes?
Estate Planning – Transfer Considerations
Who should be an owner?• Outright
• Concern regarding spousal rights
• Trust
Estate planning considerations for the next generation• Taxes for them
• Per Stirpes transfers, or passing to spouse
• Special Needs
Estate Planning – Tax Issues
Estate Taxes• Section 6166 elections
• Life Insurance
• Irrevocable Life Insurance Trust
• Funding sources• Income producing gift?
• Annual premium financing?
• Combination of both
Income Taxes• Capital Gains vs. Income Tax
• Sale for less than full fair market value creating a gift
Planning Considerations
S Corporation stock• Need to make sure that estate planning vehicles are qualified shareholders
Trustees• Important discussions concerning business succession
• Is this individual involved in the day-to-day operations?• Does this individual have necessary business acumen?• Does a potential corporate trustee have the relevant business background,
or a division, to be able to run the business?• Issues potentially multiply if there are co-trustees
Planning Considerations – continued• Business Advisors
• Ability to name individual(s) to have control over the business operations, and to direct the trustee to take certain actions
• Individual vs. Group
• Experience vs. Inexperience
• Relationship with the trustee
• Relationship with the beneficiaries
• Constraints on operations and timeline for operating business
• The scope of authority for the Business Advisors is important because one never knows what type of exit transaction will occur (stock sale vs. asset sale)
• Consider adding provisions to place oversight on the Business Advisors• Great role for a Trust Protector
• Power to overrule decision
• Power to remove a Business Advisor
• Power to appoint a successor Business Advisor
• Philosophy memorandum
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Q&A
Steve Douglas, Director PorteBrown [email protected]
Henry Kaskov, ASA, PresidentKaskov Valuations, Inc.847-637-0511Henry@KaskovValuations.comwww.kaskovvaluations.com
Timothy J. Leake, PartnerHinshaw & Culbertson [email protected]
“The advice you need for the life you want”
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Thank you!A copy of the slide deck and recording of the meeting will be sent as a follow-up. Thank you for attending.