THERE MUST BE SOME KIND OF WAY OUT OF HERE!
Presented by:
R.A. Bobbi Hayes, CPA, CFE, CEPA
Partner with Accounting & Consulting Group, LLP

Importance of Business Transition:
 12 million Baby Boomers (born 1946-1964) own
privately held businesses in the United States.
 Their illiquid wealth within these businesses is
estimated to be over $10 trillion.
 70% of these businesses will change hands in the
next ten years.
2

Importance of Business Transition:
 250,000 Baby Boomers turn 65 every month.
 Roughly 17% of baby boomers now report they
are retired – up from 10% in 2010.
 At age 66, 39% still working full time, at age 68,
32% still working full time
3
EE = Employee Equivalent
8,326
businesses
with 500-999 EEs
82,334 businesses with
100-499 EEs
508,249 businesses
with 20-99 EEs
4,320,290 businesses with 1-19 EEs
17,646,062 Non-EE businesses
Source: VIP Forum analysis of the Survey of Consumer Finances, 2008
4

66% of all businesses with employees,
nearly 4 million companies, are owned by
baby boomers.

In 2013, 84% of all construction companies
were owned by baby boomers (FMI).

M0st construction companies plan to
transition internally (MBO, ESOP, or family).
5

52% of owners do not have the
management team to support them if they
were to leave tomorrow.

17% expect to sell to a third party. Very few
will be successful due to presence of an
inadequate management team.
6

37% expect to sell to employees.

24% expect to sell or gift to family.

17% expect to do a combination of selling to
both employees and family.

5% plan to just liquidate.
7

The process by which you
plan an transition from your
illiquid business.

Business owners need to
monetize and protect the
wealth that is trapped in
these businesses.
8

Sales of businesses occur in cycles
Ten Year Transfer Cycle
1980
1990
2000
Estimated 2010
Deal Recession
Deal Recession
Almost Recession
(Buyer’s Market)
(Seller’s Market)
(Neutral Market)
1983
1993
2003
2013
1988
1998
2008
2018
1990
2000
2010
2020
Source: Rob Slee
9


60% of construction company owners have
a formal plan in place to ensure continuity
of operations in event of death. (FMI)
39% of construction company owners have
a formal plan in place to transition
themselves out of management the
business. (FMI)
10

The average business owner spends 80
hours preparing a business plan and only 6
hours preparing for their transition.
 This is not a way to maximize value of your
biggest monetary investment (generally)!
11

Privately-Held businesses typically are:
 The largest asset/investment that an owner or
family will possess.
 The primary source of income for an owner and
family.
 Vehicles for paying bills as well as accumulating
and transferring wealth.
 The source of pride/legacy.
12

So, how will millions of Business Owners:
 Convert their illiquid, primary asset to cash?
 Replace the income from the business?
 Transfer their business wealth to the next
generation?
 Protect their legacy?
 Remove themselves
from personal liability
and bonding?
13

Transitioning a business is a
process, not an event.

Is only an event if 3 D’s (death,
disability, divorce).

Needs a written plan.

To build an transition strategy
plan you need information and
a perspective on what you are
trying to accomplish.

Ongoing monitoring.
14

A comprehensive road map to successfully
transition a private business.

It asks and answers all of the issues concerning:
 Your business (value, value preservation, value




enhancement).
Your personal needs (legacy).
Your financial position and needs.
Legal issues (trust, gift, etc.).
Addresses tax questions involved in selling a privately
owned business OR gifting to heirs.
15

It is assumed that most of an owner’s
wealth is tied to their business

Another safe assumption is that an owner
would like to protect that wealth through
diversification
Key Question
Think about what percentage of your total net worth
is tied up in your privately-held business?
(if you know the value of your business)
16

Private Business Owner Stock is usually a
concentrated position for that owner.
 It can be more than 80% of owner’s net worth.

Owners needs DIVERSIFICATION of assets.

Greater diversification means spreading risk
over many holdings.
17

An owner might be maxing out their 401k
and IRA, but the rest of their cash usually
goes to supporting their lifestyle and the
company.
18
1.
Setting Transition Goals
2.
Financial Readiness
Mental Readiness
3.
Identify Type of Transitioning Owner You Most Resemble
4.
Learn & Choose Your Transition Option
5.
Understand the Value of the Option You Choose
6.
Execute Your Transition Strategy Plan to Reach Your
Goals and Protect Your Wealth
19
The Personal Assessment of the
business owner’s readiness for an transition
1.
What do you want to achieve?
2.
Are you Financially Ready for the transition?
3.
Are you Mentally Ready for the transition?
20

The transitioning owner’s goals for their transition will
be the driver behind an transition planning engagement

What would you most like to achieve with the transition
from your business?
Legacy to Heirs
Reward Loyal EE’s/Employee Transfer (ESOP)
Cash Out & Continue to Work
Cash Out and Leave
Fund Retirement Lifestyle
21

Business owners must work with their team
of advisors to put together a WRITTEN plan
that:
 Identifies and prioritizes financial and non-
financial goals.
 Establishes a business, professional and
personal strategy to achieve the goals.
 Sets a time frame (3-5 years generally).
 Lists post-transition activities.
22
Owner
Transition
Planning
Advisor Quarterback
Insurance
Advisor
M&A /
Valuation
CPA
Wealth
Management
Advisor
Family
Business
Coach
Attorney
23

Transition planning involves the integration
of business-level planning and reflects the
owner’s circumstances and needs with
financial, professional and personal goals.
24
1.
Setting Transition Goals
2.
Financial Readiness
Mental Readiness
3.
Identify Type of Transitioning Owner You Most Resemble
4.
Learn & Choose Your Transition Option
5.
Understand the Value of the Option You Choose
6.
Execute Your Transition Strategy Plan to Reach Your
Goals and Protect Your Wealth
25

The transitioning owner’s financial
readiness for an transition will be a
strong determinant of what
options are realistically available
for their transition

Consider - What amount of investable assets in
your account will be sufficient to satisfy your
post-transition lifestyle?
26

Relying on sale proceeds to finance
retirement = lower financial readiness

Don’t need to rely on sale monies = higher
financial readiness
27
1.
Setting Transition Goals
2.
Financial Readiness
Mental Readiness
3.
Identify Type of Transitioning Owner You Most Resemble
4.
Learn & Choose Your Transition Option
5.
Understand the Value of the Option You Choose
6.
Execute Your Transition Strategy Plan to Reach Your
Goals and Protect Your Wealth
28

How you, the owner, view your transition is
critical.

Too many business owners are emotionally
attached to their businesses.

When truly seen for what your business is
(which is an investment) you can make
better financial decisions.

75% of business owners profoundly
regretted selling twelve months later.
29

Are you ready to leave?
 How involved are you in the day-to-day running
of the business?
 Do you have a plan as to how you will spend
leisure time away from the business?
 Are the thoughts and habits of running a
business so routine that you won’t know what
to do after the transition?
30

Are you ready to leave?
 Do you view the business as providing a good
return on invested capital, or more interested in
the lifestyle that the business provides?
 Will you be able to think clearly throughout the
transition process so that the decisions you
make are based on objective criteria instead of
the subjective ways in which you feel about the
transition?
31
1.
Setting Transition Goals
2.
Financial Readiness
Mental Readiness
3.
Identify Type of Transitioning Owner You Most Resemble
4.
Learn & Choose Your Transition Option
5.
Understand the Value of the Option You Choose
6.
Execute Your Transition Strategy Plan to Reach Your
Goals and Protect Your Wealth
32

Financially Ready and Ready to Go
 More transition options, lower daily
involvement in business, value of business not
large % of assets.

Financially Ready but Chooses to Work
 More transition options, typically daily
involvement in business, value of business not
large % of assets.
33

Stay and Grow
 Less transition options, daily involvement in
business, value of business large % of assets, sees
value in growing business.

Get Me Out!
 Less transition options, typically daily involvement
in business, value of business large % of assets, not
prepared for financial transition, but is ready
nonetheless (BURNED OUT!).
34
High
Financially Ready
but choose to
work
Financially Ready &
Ready to Go
Low
Stay & Grow
Get me out for
whatever you can
Financial
Readiness
High
Low
Mental Readiness
35
1.
Setting Transition Goals
2.
Financial Readiness
Mental Readiness
3.
Identify Type of Transitioning Owner You Most Resemble
4.
Learn & Choose Your Transition Option
5.
Understand the Value of the Option You Choose
6.
Execute Your Transition Strategy Plan to Reach Your
Goals and Protect Your Wealth
36
1.
Sale of the Business to third party
2.
Private Equity Group (PEG)
Recapitalizations
3.
Employee Stock Ownership Plans (ESOPs)
4.
Management Buyouts (MBO)
5.
Gifting Programs
6.
Shut Down – Orderly Liquidation of Assets
37
The primary transition options fit into our transition Quadrant Chart
Financial
Readiness
MBO, Gift, ESOP
Gift, Charity,
ESOP, Sell
PEG Recap.,
ESOP, Grow Bus.,
Increase Savings
Get me out for
whatever you can
Mental Readiness
38
39
A simpler way to view these transfer options is to see them as:
Internal Transfers
Employee Stock
Ownership Plans
Management
Buyout
Gifting
or
External Transfers
Private Equity
Group
Recapitalization
Sale to an
Outside Buyer
40

Owners may choose to transition their business
via a sale to an industry buyer, competitor.

This type of transitioning owner is generally aware
that this is the way to get the highest price,
however most owners have unrealistic
expectations of values that will be extremely
difficult to meet.
Sale to an
Outside Buyer
Synergy Value
41

Owner gets the highest value.
 But likely loses their job.

They give up strategic &
financial control of business if
they do stay on as part of deal.

No future value is available –
no income stream from
business.
42

Owners will not receive the highest value

Rarely an option for construction contractors.

Investment value includes a multiple of
earnings, no synergies paid for

If some equity is kept, could get second bite of
apple later when PEG transitions
Recapitalization
Investment
Value
43

An ESOP allows for:
 The creation of a buyer for the company’s
shares.
 Diversification for the owner, maintain control.
 Increase Company cash flow (tax deduction for
stock purchase).
 Benefit to employees.
44

Owner receives lower value.

They do not sell control or bring in new partners.

Owner keeps their job, salary, perks (reasonable).

Owner participates in future value of business.

A properly installed ESOP can boost morale of
employees.
ESOP
Fair Market
Value
45

Owner may choose to transition by selling
the company to the management team.

A High Level of financial readiness is
recommended due to the inherent
uncertainties involved with converting
employees into owners.
Management
Buyout
Investment
Value
46

Special issues with management buyouts:
 The employees don’t have the money to buy your
business – current owner holds a note.
 The managers do not take risks like you.
 Your relationship with the managers changes from
employer/employee to partners.
 You are negotiating with the people who worked for
you.
 The business will likely need to serve as collateral for
the transition to function properly.
47

MBO benefits are:
 The managers know the business, so value is maintained
through continuity.
 There is an affinity towards this group who helped build
the wealth in the company.
 A controlled transition that can occur over many years,
providing flexibility to deal with structure and taxes.
 You can maintain control.
 A management buyout does not require a third party.
48

You may choose to make gifts of stock to family
members or others

A High Level of financial readiness is recommended
due to the fact that the owner is gifting away assets

Larger estate planning techniques are likely
required

Intra-family transfers can have lots of drama
Gifting Program
Fair Market
Value
49
1.
Setting Transition Goals
2.
Financial Readiness
Mental Readiness
3.
Identify Type of Transitioning Owner You Most Resemble
4.
Learn & Choose Your Transition Option
5.
Understand the Value of the Option You Choose
6.
Execute Your Transition Strategy Plan to Reach Your
Goals and Protect Your Wealth
50
Value is determined by Transition Channel
Internal Transfer
External Transfer
Employee Stock
Ownership Plans
Private Equity Group
Recapitalization
Gifting
Sale to an Outside
Buyer
Fair Market Value
“Market Value”
Discounts May Apply
Investment
Value
Synergy
Value
Management Buyout
51

Most construction owners (48%)
expect to sell for book value
(shareholders’ equity).

40% of construction company owners
expect to sell for a multiple of
earnings cash flow.

Owners most often think “4 to 5
times.” Very few deals are made at
that level.
52
1.
Setting Transition Goals
2.
Financial Readiness
Mental Readiness
3.
Identify Type of Transitioning Owner You Most Resemble
4.
Learn & Choose Your Transition Option
5.
Understand the Value of the Option You Choose
6.
Execute Your Transition Strategy Plan to Reach Your
Goals and Protect Your Wealth
53
1. EXECUTIVE SUMMARY
8. TAX ANALYSIS
2. YOUR GOALS AND OBJECTIVES 9. RECOMMENDATIONS
3. PERSONAL CONTINGENCY
PLAN
4. YOUR BUSINESS: A BASELINE
VALUATION
5. VALUE FACTOR ANALYSIS
6. VALUE ENHANCEMENT
OPPORTUNITIES
10. ACTION PLANS
11. PROFESSIONAL ADVISORS
12. GLOSSARY
13. EXHIBIT A: PRESALE DUE
DILIGENCE CHECK LIST
14. EXHIBIT B: LIMITED SCOPE
BUSINESS VALUATION REPORT
7. TRANSITION OPTIONS AND
CONSIDERATIONS
54
Comments and suggestions are appreciated!
R.A. Bobbi Hayes, CPA, CEPA, CCIFP, CFE, CFF
Partner
Accounting & Consulting Group, LLP
2700 San Pedro NE
505-883-2727
bhayes@acgsw.com
Alamogordo ¤ Albuquerque ¤ Carlsbad ¤ Clovis ¤ El Paso ¤ Hobbs ¤ Lubbock ¤ Roswell