EXIT STRATEGY PLANNING
“Achieving optimum value for your business”
4/13/2015
PACE CAPITAL RESOURCES, LLC
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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
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EXIT ALTERNATIVES
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Sell to a Strategic Buyer – 100% liquidity.
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Sell to a Financial Buyer – up to 100% liquidity.
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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?
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PACE CAPITAL RESOURCES, LLC
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ISSUES LIMITING EXIT ALTERNATIVES AND VALUE
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Is there an heir apparent to run the business in the future?
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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.
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PACE CAPITAL RESOURCES, LLC
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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?
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INGREDIANTS OF A SUCCESSFUL EXIT
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A written Exit Strategy Plan based on an owner’s objectives.
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Designed and implemented by an experienced team of advisors.
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Cash flow, maximizing value
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Management Team capable of running the business.
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Time.
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PACE CAPITAL RESOURCES, LLC
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EXIT PLAN COMPONENTS
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SEVEN STEP PROCESS
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Step 1 – Indentify Exit Objectives
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Step 2 – Quantify Business and Personal Financial Resources
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Step 3 – Maximizing and Protecting Business Value
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Step 4 – Ownership Transfer - Selling to Third Parties
•
Step 5 – Ownership Transfer - Selling to Insiders
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Step 6 – Business Continuity
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Step 7 – Personal Wealth and Estate Planning
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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.
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1. IDENTIFY EXIT OBJECTIVES
Additional Objectives:
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Shift wealth to children.
•
Provide charitable gifts or transfers.
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Reward employees.
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Receive full value for the business.
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Take business to the next level.
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1. IDENTIFY EXIT OBJECTIVES
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.
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Diverse skills and talents are necessary.
•
Team approach minimizes time and cost.
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2. QUANTIFY BUSINESS AND PERSONAL FINANCIAL RESOURCES
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Perform a third party valuation of the business.
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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?
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3. MAXIMIZING AND PROTECTING BUSINESS VALUE
Benefits to the Owner:
•
Increase enterprise value by creating and enhancing the value drivers of the
business.
•
Tax strategy -reduce income taxes upon sale of business.
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Protect assets from potential business and personal creditors.
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Motivate and keep key employees.
•
Create ability to sell the business.
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PACE CAPITAL RESOURCES, LLC
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3. MAXIMIZING AND PROTECTING BUSINESS VALUE
Value Drivers:
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Proven management team.
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Reliable operating systems and processes.
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Effective financial controls.
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Realistic growth strategy.
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Product differentiation.
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Proprietary technology.
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Market defensibility.
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Established and diversified customer base.
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Established and diversified vendor base.
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PACE CAPITAL RESOURCES, LLC
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3. MAXIMIZING AND PROTECTING BUSINESS VALUE
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.
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PACE CAPITAL RESOURCES, LLC
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FIVE FORCES – BALANCE OF POWER
Competitive Rivalry:
Threat of New Entry:
Cost advantages
Economies of scale
Time and cost of entry
Barriers to entry
Supplier Power
Threat
of New
Entry
Competitive
Rivalry
Number of Competitors
Quality differences
Customer loyalty
Switching costs
Buyer Power
Supply Power:
Buyer Power:
Number of suppliers
Size
Cost of Changing
Threat of Substitute:
Cost of Change
Performance
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Threat of
Substitute
PACE CAPITAL RESOURCES, LLC
Number of customers
Price sensitivity
Ability to substitute
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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?
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PACE CAPITAL RESOURCES, LLC
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3. MAXIMIZING AND PROTECTING BUSINESS VALUE
Possible recommendations:
•
Management Team Development Plan.
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Profit margin improvements (outsourcing processes, procurement costs,
pricing, production improvements, cost reductions, acquisitions).
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Key Employee Incentive Compensation Plan (stock bonus, stock
appreciation rights, non-qualified compensation plan, cash bonus).
•
Separation of business assets from business operations.
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Non- solicitation, Non-compete agreements.
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Wealth transfer to children during owner’s lifetime.
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PACE CAPITAL RESOURCES, LLC
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4. OWNERSHIP TRANSFER – SELLING TO THIRD PARTIES
Benefits to Owner:
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Cash at closing.
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Eliminate or reduce financial risk.
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No family succession issues.
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Speed of exit.
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PACE CAPITAL RESOURCES, LLC
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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
4/13/2015
PACE CAPITAL RESOURCES, LLC
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5. OWNERSHIP TRANSFER - SELLING TO INSIDERS
Benefits to the Owner:
•
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.
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PACE CAPITAL RESOURCES, LLC
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5. OWNERSHIP TRANSFER - SELLING TO INSIDERS
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
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PACE CAPITAL RESOURCES, LLC
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5. OWNERSHIP TRANSFER - SELLING TO INSIDERS
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
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5. OWNERSHIP TRANSFER - SELLING TO INSIDERS
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
$2,700,000 After 3 Years
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5. OWNERSHIP TRANSFER - SELLING TO INSIDERS
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
$8,940,000 After 3 Years
Timing: 3 years
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PACE CAPITAL RESOURCES, LLC
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5. OWNERSHIP TRANSFER - SELLING TO INSIDERS
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.
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PACE CAPITAL RESOURCES, LLC
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FAMILY SUCCESSION ISSUES
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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
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Different career goals
•
Inability for parents to achieve financial goals
•
Unable to run the business
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INGREDIENTS OF SUCCESSFUL TRANSFER
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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
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Business active child demonstrates the ability and willingness to run the
business
•
There is a backup Plan B
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PACE CAPITAL RESOURCES, LLC
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INGREDIENTS OF SUCCESSFUL TRANSFER
Reasons for backup Plan B:
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Value increases to a point a buyout is financially too difficult
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Increase in value exceeds value of other assets – “fairness”
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Business becomes too complex or sophisticated for one child
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Child losses interest or becomes ill
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PACE CAPITAL RESOURCES, LLC
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6. BUSINESS CONTINUITY PLANNING
Benefits to the Owner:
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Objectives can still be achieved if you do not survive your exit.
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Retains ownership and control of business if co-owners depart.
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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
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PACE CAPITAL RESOURCES, LLC
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6. BUSINESS CONTINUITY PLANNING
Possible Recommendations:
•
Review and update continuity guidelines.
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Review and update Buy-Sell (Shareholder) Agreement
– Valuation
– Funding mechanism
– Address voluntary and involuntary termination
•
Insurance for continuity planning.
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Stay bonus plan.
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Plan for financial independence of the business.
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PACE CAPITAL RESOURCES, LLC
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7. PERSONAL WEALTH AND ESTATE PLANNING
Benefits to the Owner:
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Preserve wealth, minimize taxes using both lifetime and death planning
tools.
•
Coordinates and integrates lifetime exit objectives with the estate plan.
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In effect, estate planning becomes part of the business planning.
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PACE CAPITAL RESOURCES, LLC
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7. PERSONAL WEALTH AND ESTATE PLANNING
Possible Recommendations:
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Personal asset protection planning.
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Personal and family insurance.
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Transferring of specific non-business assets.
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Personal wealth management plan.
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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
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