Succession Planning

1. Succession Planning A way to protect andpreserve thebusinessfor the future.

2. There are many parts to an “exit plan”, or “succession plan”, as part of a business owner’s overall retirement plan.

3. Let’s take a look at “exit planning” from two perspectives.

4. Transfer to next generation(s) of family and/or to key employee(s). • This could well be the same people. • Out of 100 businesses only 12 successfully made the transfer to the next generation or key employee(s) • Of those 12, only 3 made the transfer to the third generation or key employee(s). Why?

5. A typical retirement plan portfolio built by an investment broker for a 65 year-old has approximately 50% of the asset allocation in conservative assets, such as bonds or bond funds.

6. Business owners tend to have 80% of their portfolio tied up in one aggressive asset…. their business.

7. No matter which perspective you have, you will need to know the “value” of your business. • Have you had a formal appraisal within the last twelve months? • Weighted average of four or five accounting methods. • Is the business on the beach in Hawaii or the rust-belt in Cleveland, Ohio? • Value is not just a mathematical formula. It is a judgement that is supported by various facts. • Arms length transaction between willing seller and a willing buyer.

8. Three ways to increase “value”. • Increase profits • Increase revenues vs. cutting costs • Reduce risk • What are the risk factors specific to your industry? Your company? • Position the company effectively • Have key connections to key markets • Having long-term, loyal customers • Having great relationshipswith suppliers, local government, etc.

9. The three legs of a stool for a business owner’s retirement plan: • Maximize the value of the business and it’s “saleability/transferability” • Personal financial and estate planning • These first two happen simultaneously as business value is part of the personal financial plan • Wills, trust, operating or buy/sell agreements for the business. • Life after business • Some business owners want to “die in the saddle”. • Others may want to walk away and never look back. • One can also do a little of both. Take on a role as a paid consultant.

11. As you start to see retirement on the horizon what, exactly, does retirement mean to you? What plans, specifically, both legal and financial, do you have in place right now?

12. Many businesses can fail without proper succession planning.

13. Question 1: How do you make sure you/your family/estate receives their “fair” share of the business?

14. Example: true story • Jake and Charlotte started and ran a successful company for 25 years. • Their two boys grew up in the business while their daughter had no interest. • She married a doctor and had a life away from the business. Jake & Charlotte John Jim Loretta

15. The Facts: 1975 33% Jake & Charlotte John Jim 33% 33%

16. The Facts: 2010 33% Charlotte Loretta John Jim 33% 33% 33%

17. The Problem • John has been with the company for 36 years and Jim has been there for 35 years • The business paid for all of Charlotte’s expenses while at home, with 24 hour care, and then at a nursing home for 2 years • While the company is run very lean both John and Jim take home $200,000 • Loretta is willing to “work” for her 1/3 of the revenue. “That is only fair”

18. Opportunity Lost • A buy sell plan would have set the expectations of all family members and avoided a bitter dispute and the demise of the company

19. Possible Solution • By setting up an Entity Purchase Buy-Sell Arrangement or a Cross Purchase Arrangement before Jake’s death to ensure the success of the business for the next generation. • Redemption Plan . . . Family Company Mom John Jim 50% 50% $18,000 Annual $1,000,000 Life/LTC

20. Possible Solution Mom’s Estate: Corp Stock $1,000,000 Home Proceeds $350,000 Cash $150,000 Personal Prop ? 0 TOTAL $1,500,000 Family Oil John Jim 50% 50% Even? John $500,000 Jim $500,000 Loretta $500,000 TOTAL $1,500,000 $18,000 Annual $1,000,000 Life/LTC

21. Conclusion • The failure to create, document and discuss the family and business plan cost the family • There is no “right” answer. The proper plan is memorializing the goals and objectives of the owners . . . • And, hopefully, notifying them before the time comes to implement the plan (death, disability, retirement, divorce, etc.)

22. Question 2: How do you prevent the loss of sweat equity in the family business?

23. Multi-Generational Planning

24. History of B, Inc. • Large family owned commercial construction business. • 70 years with a construction license 100% Great Grandpa 1956 Charlie & Nat Harry & Sara 100%

25. The History of B, Inc. Charlie 1997 Tom Bill Peter 33% 33% 33%

26. Part I B, Inc. Tom Bill Peter 33% 33% 33% 2006 Company Valuation 15 Year Buy Out (with interest) Seat on the Board

27. Part II B, Inc. Tom Bill Peter 2012 50% 50% Matthew Michael Alex Johnny

28. The Problem B, Inc. Tom Bill Peter 50% 25% 25% 0% for: Wife Lisa Matthew Michael Alex

29. Possible Solution • While they had a documented plan the failure to update the plan when an owner left and/or when children entered the business created many unaddressed issues • At the end of the day one of the main issues was liquidity: • Bill was forced back into the business (owns 25%) • Credit/bonding resources were in jeopardy • Helping as much as Tom and Bill could, put Peter and Lisa’s boys through college

30. Possible Solution Peter Tom Bill $20,000 to Age 65 $2,000,000 CSV $339,212 * $20,000 to Age 65 $2,000,000 CSV $342,159 * $20,000 to Age 65 $2,000,000 CSV $306,966 * * The data shown is taken from an illustration. It assumes a hypothetical rate of return of 7% from the historical performance of the S&P 500. These values may not be used to project or predict future investment results.

31. Question 3: How do you protect your business from the loss of a key employee?

32. Key Person Insurance • Insurance policy taken out on the life of a key employee or owner to protect the business in case of sudden death, disability or retirement. • Key person could be an owner, partner, or employee whose knowledge and contributions to the company are invaluable. • Can be an incentive for key employee(s) to stay by creating a ready market to sell the business to.

33. One more thought • We’ve worked with a lot of businesses with an aging principal and a 2nd generation of non-family members poised to take over • The issue: How do we transfer the business? • I don’t want to give it to them • They will never be able to pay for it • The more I pay them the more they spend

34. The Trustee Buy Sell Buy Sell Trust Inc 100% Mr. Cross #1 #2 #3 Premiums paid by business; taxable to EE’s No access to Cash Values; retention tool

35. The answer to all of these questions is: Succession Planning

36. What is Succession Planning? • Succession planning is a very large part of exit planning. • It is the risk management portion of an exit plan. • A plan put in place to ensure the survival of the business if something happens to one of its owners or key employees. • It can be either: • Buy-Sell Arrangements • Key Person Insurance • Both

37. Why Succession Planning? • Without a properly funded succession plan in place, struggles for control can result in destruction of the business. • Prevent sale of the business to unwanted outside owners. • Make sure the business receives fair market value. • Ensure sufficient cash to pay estate taxes, bills and income needs, and possibly a ready made market to sell the business to.

38. Buy-Sell Arrangements A buy-sell arrangement is an agreement between business owners in which one party agrees to sell an interest in the business and the other agrees to buy it.

39. Why Use Buy-Sell Arrangements? • Guarantee a buyer • Create Liquidity • Set a Fair Selling Price • Fix Value

40. Business Succession Planning • Succession plans are put in place to ensure the survival of the business upon retirement, death or other changes in the business relationship. • They are an essential part of any business and can help make the transition of ownership to the next generation or key employee(s) easier. • Funding the risk management portion of the plan is critical because not all business transfers are due to retirement.

41. Succession Planning THANK YOU