Business Succession Planning Presentation

During This Session You Will Learn:

What is a Business Succession Plan

Why does every business need one

The components of a succession plan

How to start the process


Adapted from Business Succession Planning Model, Community Futures
Meridian Region, Western Economic Diversification Canada

Business Succession Planning

Business Succession Plan:

 A Business Succession Plan is a multidisciplinary process
providing a comprehensive and strategic approach to guiding
the transition of business ownership.

 It is a roadmap…you can never start too early
 It is to be a dynamic document…changes with you
 Used as a guide to manage the issues of transition
 It allows the business owner to anticipate and manage change
 Should be coordinated with the owner’s estate plan
 Unique to each owner… “one size does not fit all”


Why do you need one?:



 A Business Succession Plan is an important component of any
business’ strategic process. It will aid the business owner in:

 Preparing for the time when they will retire
 Addressing extreme matters such as illness or death
 Securing the survival of the business through transition of ownership
 Maximizing the return of the retiring owner’s
investment
 Minimizing tax burden at transfer



 By not preparing a Succession Plan the business owners risk:

 Monetary loss due to unexpected estate, gift, and income tax
issues
 Huge gaps in wealth from lack of business valuation activities
and financial planning
 Jeopardizing the future of the business



 In summary a Business Succession Plan is needed:

 Proactively identify the new owners
Family, employees, third party or combination


 To address the orderly departure of owners from a business
 To address the transfer of ownership for an unplanned
circumstance (i.e., partnership disagreements,
illness, death)


The Reality For Business Owners
 80% of business owners are exiting their business to retire,
they are not serial entrepreneurs

 The principal fear is “Will I have enough money so that I can fund
my retirement lifestyle without running out of money”?
 Other considerations may include wealth transfer to the
next generation, charitable giving, and minimizing taxes
 They want to identify the potential buyer/owner
 They want to pass along a business legacy



 Typically 50-75% of a business owner’s net worth is in
his/her business assets. The balance is in their personal
real estate & financial investments

 You only have ONE chance
to transfer your largest asset
Equities

Real Estate

Business


 Most business owners have only an anecdotal
perception of the value of their business…
“My brother in law knew a guy who had a
business like mine that sold for…”
 Relying on this type of perception can lead
to large gaps in future wealth and quality of life
 Important to have realistic expectations from
the beginning



 85% of all small business owners do not have a Business
Succession Plan, a wealth management plan, and/or an
advisory team to assist them

 Very few start the process early enough to achieve the
maximum benefit of valuation and planning…its never too
early



 Ideally the process should start when the business starts or
becomes viable. It should encompass:
 Entity structure
 Owners as individuals
 Shareholder, member, or partnership agreement


There Are Only 5 Places Your Money Can Go

and/or Creditors


…And the 5th Place Your Money Can Go

 Your advisors…pay a few modestly at the beginning and along
the way

 …Or pay many handsomely at the end

 A Business Succession Plan will let YOU decide where your hard
earned assets end up


Components of the Business
Succession Plan


Components of the Business
Succession Plan
Establishing Goals and Objectives

Family Involvement in the Process

Identifying Successors

Estate Planning

Contingency Planning

Entity Structure, Transfer Methods, Taxes

Business Valuation

Exit Strategy

Implement & Follow-Up



 Owner retirement goals
 How do you plan to spend your retirement?
 Family member goals
 Involved/not involved in business?
 How will they be impacted?
 Goals of other stakeholders (partners, employees)
 Will business transfer to them?
 How will the business operate during transition?
 Goals for addressing disagreements, illness, and death
 Assessing your risk tolerance



 Communication
 Establish a formal process of communication
 Process for hearing concerns & opinions
 Process for handling family change & disputes
 Divorce, death, injury
 May involve outside help (lawyers, accountants)
 Family vision for the business
 Relationship between family & business
 Separate the two


Indentifying Successors


Indentifying Successors

 Who will take over the business
 Partner, Family member, employee, third party buyer
 Training Successors
 Establish a training plan
 Build support for successors
 Among family members, employees, customers, suppliers
 Teach successor to build vision for the business
 It may be different from yours
 All affected parties must be “on board”


Estate Planning


Estate Planning
 Provision for family members
 Develop Estate and Personal Financial plans for owners, spouses, family
members

 Active & Non-active family members

 Other financial considerations
 Financial issues relating to the transfer of the business
 Plan for the value at exit, provision for gaps


Estate Planning
Gift Tax
Annual Exclusion Applicable Applicable Maximum
Year
Amount Credit Exclusion Marginal Tax
Per Donee Amount Amount Rate
2002 $11,000 $345,800 $1,000,000 50%
2003 $11,000 $345,800 $1,000,000 49%
2004 $11,000 $345,800 $1,000,000 48%
2005 $11,000 $345,800 $1,000,000 47%
2006 $12,000 $345,800 $1,000,000 46%
2007 $12,000 $345,800 $1,000,000 45%
2008 $12,000 $345,800 $1,000,000 45%
2009 $345,800 $1,000,000 45%

2010 $330,800 $1,000,000 35%

2011 $330,800 $1,000,000 35%


Estate Planning

 Taxes
 Must be carefully considered to retain wealth
 Requires professional advice and thought out Exit Plan

 Retirement Income
 Identify sources and quantity of wealth required
 Establish a wealth plan to preserve quality of life
in retirement


Estate Planning
Estate & Generation-Skipping Transfer Tax

Applicable Applicable Maximum
Year
Credit Exclusion Marginal Tax
Amount Amount Rate

2002 $345,800 $1,000,000 50%
2003 $345,800 $1,000,000 49%
2004 $555,800 $1,500,000 48%
2005 $555,800 $1,500,000 47%
2006 $780,800 $2,000,000 46%
2007 $780,800 $2,000,000 45%
2008 $780,800 $2,000,000 45%
2009 $1,455,800 $3,500,000 45%
2010 REPEALED
2011 and thereafter (unless Congress intervenes) $345,800 $1,000,000 50%


 Plans rarely proceed smoothly
 Economic downturns
 Illness/death of owner or key employee
 Natural disasters

 Look at “What if” scenarios

 Prepare a list of possible situations
 Identify the course of action
 Formalize it in a legal document
 Fund contingencies with insurance or other investment
vehicles



 Identify roles & responsibilities
 Family members & key employees should have clearly defined roles

 Fill key positions
 Management positions
 Specialty positions

 Structure organization based on the successor
 Establish roles for family members
 Separate ownership & management roles


 Role of retiring owner
 Advisor, Consultant, Chairman of Board

 Identify key members of transfer team
 Attorneys
 Accountant
 Intermediary
 Business Brokerage or M&A Firm

 Financial Partner
Bank, SBA, Venture Capitalist, PEG



 2008 Tax Rates

If taxable income is: The tax is: of the amount
but not over--
Over-- over--

$ 0 $ 16,050 10% $ 0
16,050 65,100 $ 1,605.00 + 15% 16,050
65,100 131,450 8,962.50 + 25% 65,100
131,450 200,300 25,550.00 + 28% 131,450
200,300 357,700 44,828.00 + 33% 200,300
357,700 .... 96,770.00 + 35% 357,700


Entity Structure, Transfer Methods,
Taxes

 2008 Tax Rates

 Generally, gain from the sale of long-term (held more than 12 months)
capital assets and qualified dividend income are subject to a maximum
capital gains tax rate of 15% (0% for individuals in the 10% or 15% tax
bracket through 2010).


Business Valuation


Business Valuation

 Identifies what is being sold
 Inventory, Equipment, Real Estate, Stock
Establishes profitability

Assesses risk

Identifies value drivers

Scans marketplace

Considers financing strategies

Establishes relationship between earnings and value

Should be done cyclically with business planning



Business Valuation
Exit Avenue Method Authority Standard

Employees  ESOP Fair Market Value with
discounts for
or IRS
Trust
marketability & minority
Family Gifting
share

Market Value
Managers MBO Managers or
Buy Sell Agreements Investment Value

Unrelated 3rd Party Direct Asset Buyer Market Valuation
Individual or or & Strategic & Synergistic
Strategic Stock Sale Seller Value Applied


Strategies for Maximizing Value

 Value your business early… and often
 Focus on implementing business improvements
 Clean financial records & systems
 Clear ownership and control of intellectual & tangible property
 Owner is not the key employee
 Succession plan for key management positions
 Policy manual exists and is updated regularly
 Customer concentration issues addressed
 Facility and operation is clean and orderly
 Minimal overlap between owner’s personal
and business expenses


Exit Strategy


Exit Strategy
 Transfer method
 Family, employees, third party

 Establishes timelines
 Identifies schedule for implementation

 Published & distributed to stakeholders
 Clarifies roles and responsibilities
 Allows resolution for issues prior to transfer
 Aids in ensuring owner’s whishes are adhered
to in case of illness or death


Implementation & Follow-Up
 Review on same cycle as business planning

 Update & modify as circumstances change
 Conduct business valuations on same cycle to ensure that
business is on track


Most business owners spend more time planning a family vacation
than how to exit from their business.

This is not due to a lack of desire or intelligence.
It is simply because they don’t know how or where to begin.

The vast majority of owners are unaware there is a specific planning
and implementation process that can help ensure they achieve their
objectives.


Business Succession Planning Presentation

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