architecture, engineering & construction seminar - 2015
TRANSCRIPT
![Page 1: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/1.jpg)
Hosted by CBIZ and Mayer Hoffman
McCann P.C. and Spencer Fane
WELCOME TO OUR SECOND ANNUAL A/E/C SEMINAR
![Page 2: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/2.jpg)
AGENDA & GUEST SPEAKERS
Transition & Next Generation Planning Presented by: Joyce Farris & David Seitter
Break Enjoy a cookie & some fruit
Legal trends for the AEC Industry Presented by: David Schatz
Break
Hot TopicsPresented by: Joyce Farris & Erika Cundiff,
![Page 3: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/3.jpg)
TRANSITION PLANNING
![Page 4: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/4.jpg)
SUCCESSFUL BUSINESS EXECUTIVES!
![Page 5: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/5.jpg)
JACK
• Owns and manages a profitable, multi-state electrical company which he inherited from his father 30 years prior.
• Has one daughter from his first marriage; however, daughter does not work in the company.
• Recently married his 2nd wife….No prenuptial agreement signed.• Holds all of the state electrical licenses in his own name. • No will or transition documents in play.• No life insurance on Jack because he has medical issues in prior
years.• No management team because Jack does it all.• All of his personal assets are tied up in the company.• Jack is enjoying life!
![Page 6: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/6.jpg)
JILL• Owns and manages a profitable concrete/paving
contacting firm.• Purchased the firm from a non-related party and is still
paying on the purchase note agreement.• Operates as a minority, woman owned business.• Is single with no heirs.• No will or transition documents in play.• Has a capable and reliable management team in place.• Maintains a life insurance policy to cover the original
purchase of company and bank debt.• Is planning to live forever.
![Page 7: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/7.jpg)
EVERYTHIN IS GOOD FOR JACK AND JILL
Jack’s Electrical Jill’s Concrete
![Page 8: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/8.jpg)
ONE ICY MORNING ON THE WAY TO THE OFFICE
Jill and Jack collide in a not so forgiving accident! No survivors!
![Page 9: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/9.jpg)
JACK AND JILL HAD BEEN TOO BUSY FOR TRANSITION PLANNING
Jack’s Electrical Jill’s Concrete
![Page 10: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/10.jpg)
JACK’S COMPANY – AFTER ACCIDENT
• New wife steps in to take control of Company• Project managers demand high bonuses to complete jobs• Company fired from certain jobs because Project Managers
resign immediately• Various states provided notice of license revocation if a new
electrical master is not named within 30 to 90 days• Wife drains all available cash from the Company• Surety company steps in and takes over completion of
specific bonded jobs then sues the company for recovery of costs
• Bank forecloses on building• Company terminates• Daughter inherits NOTHING
![Page 11: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/11.jpg)
JILL’S COMPANY – AFTER ACCIDENT
• Strong management team pulls together – meets with the bank, surety, and prior owner
• Life insurance is collected and is utilized to pay off the original purchase of company and the bank
• The surety company steps in to manage the bonded jobs, but allows the company’s management team some leeway
• Management team works with attorneys to start a new company and to negotiate and rewrite the existing contracts in to the name of the new company
• Company fired from certain jobs because of Minority participation is violated
• Jill’s Concrete is closed
![Page 12: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/12.jpg)
IF ONLY A TRANSITION PLAN HAD BEEN IN PLACE….
![Page 13: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/13.jpg)
TRANSITION PLANNING – Partners
Still to come……
![Page 14: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/14.jpg)
TRANSITION PLANNING – Family Members
Still to come……
![Page 15: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/15.jpg)
TRANSITION PLANNING – WHAT IS IT?
• Planning for ownership transition of the business during life– Upon disability– Upon retirement– To expand ownership (family/employees)– Upon departure of one or more owners
• Planning for the ownership transition of the business upon death
![Page 16: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/16.jpg)
TRANSITION PLANNING – What Is It?
What then is transition or succession planning for you?
![Page 17: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/17.jpg)
TRANSITION PLANNING – Options?
Do Nothing
Transfer to Heirs Transfer
To Employees
Business Disposal
![Page 18: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/18.jpg)
TRANSITION PLANNING – Do Nothing?
To Do Nothing is like dropping the ball –
Its NOT an Option.
![Page 19: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/19.jpg)
TRANSITION PLANNING
How do you begin the transition
planning process?
![Page 20: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/20.jpg)
TRANSITION PLANNING –Assemble Your Team
• Key Company Personnel• Professional Advisors• Financial Planner• Insurance Agent / Surety• Strategic Planner
![Page 21: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/21.jpg)
TRANSITION PLANNING - Formulate Long-Term Action Plan
![Page 22: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/22.jpg)
TRANSITION PLANNING - Formulate Long-Term Action Plan
![Page 23: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/23.jpg)
TRANSITION PLANNING - Formulate Long-Term Action Plan
Simon Sinek “Start With Why” TED Talk
![Page 24: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/24.jpg)
TRANSITION PLANNING - Formulate Long-Term Action Plan
Most Important Phase of Transition Planning!
How do you know how to plan if you don’t know why you are
planning?
![Page 25: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/25.jpg)
TRANSITION PLANNING - Formulate Long-Term Action Plan
• Family:– Preserve family ownership of business– Enhance and preserve family assets– Minimize tax burden
• Employees:– To reward key employees
• Personal:– To maximize future value /sales price– Create an efficient transition– Ability to retire
• Company:– Capital for continuing operations– Bonding capacity
![Page 26: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/26.jpg)
TRANSITION PLANNING - Formulate Long-Term Action Plan
• Transfer all of business?• Transfer part of business?• Keep as family business?• Take on non-family partners?
![Page 27: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/27.jpg)
TRANSITION PLANNING - Formulate Long-Term Action Plan
• Immediate• Within ? Years• At death
When?
![Page 28: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/28.jpg)
TRANSITION PLANNING - Formulate Long-Term Action Plan
• Personal needs• Value• Taxes
HOW MUCH ?
![Page 29: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/29.jpg)
TRANSITION PLANNING - Formulate Long-Term Action Plan
Family Objectives
Personal Objectives
Income taxes
Estate Taxes
Retiree Compensation
![Page 30: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/30.jpg)
Desiredvalue maynot always be thesame
EstateValue
Company SaleValue
TRANSITION PLANNING - Formulate Long-Term Action Plan
![Page 31: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/31.jpg)
TRANSITION PLANNING - Formulate Long-Term Action Plan
• Adjusted book value• Capitalized earnings• Industry benchmarks
VALUATION METHODS
![Page 32: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/32.jpg)
TRANSITION PLANNING - Formulate Long-Term Action Plan
Understand how your business is valued & Strategize to increase value
• Eliminate items which reduce value• Reduce investment in assets which do not add
value• Increase items which add value• Maximize earnings
![Page 33: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/33.jpg)
TRANSITION PLANNING - Formulate Long-Term Action Plan
Family / Heirs
Employees
Outsider(s)
WHO?
![Page 34: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/34.jpg)
TRANSITION PLANNING - Formulate Long-Term Action Plan
Source: U.S. Surety Industry Survey and FMI
![Page 35: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/35.jpg)
TRANSITION PLANNING – Sell to Outsider(s)
Buyers DON’T make offers sellers can’t
refuse!(for construction
companies)
![Page 36: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/36.jpg)
TRANSITION PLANNING – Sell to Outsider(s)
• What do you have to sell?• Will management stay with new owner?• Determine potential union withdrawal
liability?
Long lead time to find a buyer.
![Page 37: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/37.jpg)
TRANSITION PLANNING – Sell to Outsider(s)
• Few sales each year & normally only contractors buy other contractors
• Most are asset purchases, not stock • Usually not the most attractive
alternative to the seller• People are the most important asset• Large backlog is always good
![Page 38: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/38.jpg)
TRANSITION PLANNING – Sell to Outsider(s)
![Page 39: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/39.jpg)
TRANSITION PLANNING – Sell to Outsider(s)
Sale of Stock
versus
Sale of Assets
![Page 40: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/40.jpg)
TRANSITION PLANNING – Sell to Outsider(s)
Seller’s Preferred Method = Stock Sale• Seller receives capital gain tax
treatment
• Purchaser generally cannot deduct purchase price until stock is sold
• Purchaser assumes all past liabilities of Company
![Page 41: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/41.jpg)
TRANSITION PLANNING – Sell to Outsider(s)
Buyer’s Preferred Method = Asset Sale
• Seller generally taxed at ordinary income rates (With a C corp. could be double taxation)
• Purchaser receives a tax deduction• Depreciation• Seller retains all past liabilities of
Company
![Page 42: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/42.jpg)
TRANSITION PLANNING – Sell to Outsider(s)
Alternative Method = Stock + Compensation
• Lower stock price in lieu of receiving compensation
– Consulting– Non-compete agreement
• Taxed as ordinary income to seller• Buyer receives tax deduction quicker• Buyer assumes all past liabilities of Company
![Page 43: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/43.jpg)
TRANSITION PLANNING – Transfer to Family / Heirs
Family dynamics in the 21st Century
![Page 44: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/44.jpg)
TRANSITION PLANNING – Transfer to Family / Heirs
![Page 45: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/45.jpg)
TRANSITION PLANNING – Transfer to Family / Heirs
• Gift to family during life
• Bequest at death
• Sell to family
• Oldco/Newco Strategy
![Page 46: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/46.jpg)
TRANSITION PLANNING – Transfer to Family / Heirs
• Annual exclusion = $14,000– Does not count towards the lifetime– Husband and wife can gift $28,000 to one heir
• Lifetime exclusion = $5.43 Million
• No taxes paid on gifts under exclusion amounts
• Top federal estate tax rate = 40%
• Transfer at lowest possible value– Discounts for marketability limits
![Page 47: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/47.jpg)
TRANSITION PLANNING – Transfer to Family / Heirs
• Appropriate estate planning
• Funds for estate taxes– If total estate > $5.43 Million
• Bequest to family member qualified to manage business
Bequest AtDeath
Still to come……
![Page 48: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/48.jpg)
TRANSITION PLANNING – Transfer to Family / Heirs
• Meet Dan and his son, Daniel.• Daniel wanted to be just like his father – joined
the family general contracting business• The general contracting business very
profitable while both were involved• Dan’s two other children, Kevin and Kendra,
did not join the family business - Kendra became a doctor and Kevin a school teacher
• Dan died suddenly from a heart attack• No transitioning planning had been performed;
however, his will left all of his stock in the Company equally to the three heirs
![Page 49: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/49.jpg)
TRANSITION PLANNING – Transfer to Family / Heirs
• For estate purposes, a valuation of the Company was performed – low value
• Kendra had no interest in stock but instead requested the Company be sold to obtain cash to pay off her student loans from medical school
• Kevin decided he might want to have a job at the Company – now on payroll
• Daniel and the Company were forced to take on substantial debt to purchase Kendra’s stock at a litigated market value
• Kevin decided as an owner, he did not need to show up for work
• Daniel forced to “fire” Kevin and take on more debt to purchase Kevin’s stock.
• With two thirds of the equity in the Company now wiped out, Daniel is struggling to renew the line of credit and with bonding limits
• Needless to say, no more Family holidays for these three
![Page 50: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/50.jpg)
TRANSITION PLANNING – Transfer to Family / Heirs
• During lifetime• Valuation depends on objectives• Estate tax vs. income tax
consequences
Sold
![Page 51: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/51.jpg)
TRANSITION PLANNING – Transfer to Family / Heirs
NEWCO• Formed by family/heirs• Minimal investment• New contracts • Hire employees or lease• Rents office space• Leases equipment• Pays management fee
OLDCO• Completes existing contracts• Retains ownership of
equipment• Retains employees or transfers• Indemnifies bonds and
guarantees bank debt• Supports Newco
![Page 52: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/52.jpg)
TRANSITION PLANNING – Transfer to Family / Heirs
• Separates future business liability and risk from valuable existing business assets
– Great for owners when liability exposure is significant i.e. gen contractors, architect firms, manufacturing, and home building
• Minimizes taxation on the transfer of assets– Newco utilizes assets leased from Oldco not purchased
• Allows for the directing of business cash flow– to either Oldco or Newco
• Allows for ongoing management involvement by the Oldco owners until satisfied the business can continue without them
Oldco / Newco
model
![Page 54: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/54.jpg)
TRANSITION PLANNING – Transfer To Employees
• Sell to Key Employee (s)
• Stock Compensation
• ESOP
• NewCo / OldCo
![Page 55: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/55.jpg)
TRANSITION PLANNING – Transfer To Employees
• Key employee (s)
• Business valuation recommended
• May need to carry back a note
• May need to stay on in a reduced capacity for specified time
• Stock or asset sale
BUSINESS
SALE
100%
![Page 56: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/56.jpg)
TRANSITION PLANNING – Transfer to Employees
• Common vision for Company
• Honest evaluation of capabilities
• Training and Mentoring
• Experience outside your Company
• Real authority
KEY EMPLOYEE
![Page 57: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/57.jpg)
TRANSITION PLANNING – Transfer To Employees
• Key employee (s)
• How much should be sold?
• May need to carry back a note
• Valuation may be an agreed upon amount
• Options exist on how to transfer ownership
BUSINESS
SALE
< 100%
![Page 58: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/58.jpg)
TRANSITION PLANNING – Transfer To Employees
• Stock bonus in lieu of cash
• Tax deduction for Company = FMV of stock distributed
• Taxable to Employee– Cash bonus to pay tax
• Shareholder dilution
Stock
compensation
![Page 59: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/59.jpg)
TRANSITION PLANNING – Transfer to Employees
Employee
Stock
Ownership
Plan
![Page 60: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/60.jpg)
TRANSITION PLANNING – Transfer To Employees
• Provides a market for the shares of successful closely held companies
– Partial or complete sale of owners stock
• To motivate and reward employees
• To take advantage of incentives to borrow money for acquiring new assets in pretax dollars
ESOP
![Page 61: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/61.jpg)
TRANSITION PLANNING – Transfer to Employees
In almost every case, ESOPs are a contribution to the employee, not an
employee purchase
ESOP
![Page 62: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/62.jpg)
TRANSITION PLANNING – Transfer To Employees
An ESOP is a tax-qualified, defined contribution, employee benefit plan (ERISA)
- Similar to a profit-sharing plan• Invests primarily in the stock of the
sponsoring company• “Tax-Qualified” in that sponsoring company
and selling shareholder receive various income tax benefits
ESOP
![Page 63: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/63.jpg)
TRANSITION PLANNING – Transfer To Employees
• Company establishes a Trust Fund
• Company contributes cash to Trust Fund as a contribution to the benefit plan– Tax deductible– 25% of payroll for S Corporations, more if a C Corporation
• Trust uses cash to purchase stock from the departing stockholder
ESOP
![Page 64: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/64.jpg)
TRANSITION PLANNING – Transfer To Employees
• Shares in the trust are allocated to individual employee accounts– Basis of relative salary– Other equal formula
• Generally all full-time employees over 21 participate in the plan
• Vesting schedule is in place
• Employees must be 100% vested within 3 to 6 years
• When employees leave the company, they receive their stock, which the company must buy back from them at its fair market value
ESOP
![Page 65: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/65.jpg)
TRANSITION PLANNING – Transfer To Employees
• Shares in the trust are allocated to individual employee accounts– Basis of relative salary– Other equal formula
• Generally all full-time employees over 21 participate in the plan
• Vesting schedule is in place
• Employees must be 100% vested within 3 to 6 years
ESOP
![Page 66: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/66.jpg)
TRANSITION PLANNING – Transfer To Employees
• Alternatively, the ESOP can borrow money to buy new or existing shares, with the Company making cash contributions to the plan to enable it to repay the loan
• Allows for the Company owner to be completely bought out in less time.
ESOP
![Page 67: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/67.jpg)
TRANSITION PLANNING – Partners
Lets recap your plan up to now .. Unless you sold 100% of your Company .. You have either:
– Gifted or sold a portion to heirs, or– Gifted or sold a portion to employees
Either way, you now have
PARTNERS
![Page 69: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/69.jpg)
ENGINEERS R US, INC.
• Renee, Mary, Liza, Ben and Josh – Partners in Engineers R Us, Inc.• The Company has been profitable every year of operations• All Partners signed a personal guaranty on the debt• No agreements between the Partners• Josh decides to leave the Company• Josh receives offer to purchase his stock from the disgruntled ex-wife of Ben
![Page 70: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/70.jpg)
TRANSITION PLANNING – Partners
• Foundation of business succession• Restricts transfer of stock• Establish value of stock• Establish terms of buyout & non-
compete• Provisions for departing owners
– Death– Disability– Retirement
Buy / Sell Agreement
![Page 71: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/71.jpg)
TRANSITION PLANNING – Partners
Redemptionvs.
Cross Purchase
Buy / Sell Agreement
![Page 72: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/72.jpg)
TRANSITION PLANNING – Partners
Buy / Sell Agreement – Redemption• Between Company and Stockholder
• Common to fund redemption with insurance
• Insurance proceeds:– May be subject to Corporate AMT tax– May increase value of Company for estate taxes
![Page 73: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/73.jpg)
TRANSITION PLANNING – Partners
Buy / Sell Agreement – Cross Purchase • Contract between stockholders
• Surviving stockholders purchase stock
• Insurance policies owned by stockholders
• Works best with on a few stockholders
![Page 74: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/74.jpg)
TRANSITION PLANNING – Summary – 7 Steps
1. Set objectives2. Determine purchase price3. Determine value4. Convert business value to cash5. Transfer the business6. Develop a contingency plan7. Wealth preservation
![Page 75: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/75.jpg)
TRANSITION PLANNING – Summary – Your Next Steps?
1. Plan for yourself. 2. Plan for your business.3. Test it.4. Get your team to buy in.5. Execute.
![Page 76: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/76.jpg)
TRANSITION PLANNING
![Page 77: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/77.jpg)
TRANSITION PLANNING –
QUESTIONS
![Page 78: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/78.jpg)
Hosted by CBIZ and Mayer Hoffman
McCann P.C. and Spencer Fane
![Page 79: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/79.jpg)
Trends in the Legal Construction Industry
![Page 80: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/80.jpg)
Where are we going today:
• Workforce shortage• Trends in Real Estate for 2015• Trends in Construction for 2015• Risk Shifting
– Contracts– Insurance
![Page 81: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/81.jpg)
Workforce Shortage
• Construction industry shed over 2.2 million jobs from 2007-2011
• So, what does this mean?– Risk to the Project– Risks of assignment/sub-contracting– Owners becoming more involved in sub approval– Subcontractor bonds– Subguard
![Page 82: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/82.jpg)
Trends in Real Estate for 2015
• Multifamily– REIT– Institutional Investors
![Page 83: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/83.jpg)
Trends in Real Estate for 2015
• Senior living– Some forecasts show the growth rate of the 75+
population more than doubling from between 1.0%-1.5% in 2013 to roughly 3% around 2018.
![Page 84: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/84.jpg)
Trends in Real Estate for 2015
• Senior living– By 2030—when all baby boomers will have reached
age 65—there will be about 72.1 million older Americans—more than double their number in 2000—according to data from the Administration on Aging.
![Page 85: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/85.jpg)
Trends in Real Estate for 2015
• Increased institutional money– “Foreign” investors– REITS
![Page 86: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/86.jpg)
Trends in Real Estate for 2015
• Industrial– Growth in gateway markets– Amazon distribution model
• 70 distribution facilities totaling 54.8 million square feet• 18 sortation facilities totaling 5.7 million square feet
![Page 87: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/87.jpg)
Construction Trends
• Union activity• Increased regulations
– 2014—78,978 pages of new regulations which impact contractors
• Interest rate increase?• Growth of P3s• Higher Education/Health Care
![Page 88: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/88.jpg)
Contracts
• Pay-if-Paid – Single biggest shifting of risk between GC and Subs
• Scope of work• Indemnity• Liquidated damages
![Page 89: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/89.jpg)
Contracts
• No additional days for weather• Waiver of consequential damages• Notice provisions• Differing site conditions
![Page 90: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/90.jpg)
Designer’s Limitation on Liability
• Limit liability to cost of work or insurance– Up and Down Contract Chain
![Page 91: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/91.jpg)
Confusion over Warranty Claims
• Express• Implied• Statutory
![Page 92: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/92.jpg)
3.5 Warranty• 3.5.1 The contractor warrants to the Owner and Architect that materials
and equipment furnished under the Contract will be of good quality and new unless otherwise required or permitted by the contract Document, that the Work will be free from defects not inherent in the quality required or permitted, and that the Work will conform to the requirements of the Contract Documents. Work not conforming to these requirements including substitutions not properly approved and authorized, may be considered defective. The Contractor’s warranty modifications not executed by the Contractor, improper or insufficient maintenance, improper operation, or normal wear and tear and normal usage. If required, the Architect, The Contractor shall furnish satisfactory evidence as to the kind and quality of materials and equipment. AIA A201-2007
![Page 93: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/93.jpg)
Other “Warranties” in Contract
• Work will be done to the “Highest Standard” of the industry
• Contractor will provide “Best Workmanship”• That the contractor is an “Expert”
![Page 94: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/94.jpg)
“Industry Standard”
• People think standard construction contract contains a one-year warranty.– Limit warranty by annually 1 year
![Page 95: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/95.jpg)
“One-Year Correction Period”• 12.2.2 AFTER SUBSTANTIAL COMPLETION
• 12.2.2.1 In addition to the Contractor’s obligations under Section 3.5, if within one year after the date of Substantial Completion of the Work. . . , any of the Work is found to be not in accordance with the requirements of the Contract Documents, the Contractor shall correct it promptly after receipt of written notice from the Owner to do so . . . During the one-year period for correction of Work if the Owner fails to notify the Contractor and give the Contractor an opportunity to make the correction, the Owner waives the right to require correction by the Contractor and to make a claim for breach of warranty. If the Contractor fails to correct nonconforming Work within a reasonable time during that period after receipt of notice from the Owner or Architect, the Owner may correct in accordance with Section 2.4.
![Page 96: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/96.jpg)
Waiver of Subrogation• § 11.3.7 WAIVERS OF SUBROGATION
– The Owner and Contractor waive all rights against (1) each other and any of their subcontractors, sub-subcontractors, agents and employees, each of the other, and (2) the Architect, Architect’s consultants, separate contractors described in Article 6, if any, and any of their subcontractors, sub-subcontractors, agents and employees, for damages caused by fire or other causes of loss to the extent covered by property insurance obtained pursuant to this Section 11.3 or other property insurance applicable to the Work, except such rights as they have to proceeds of such insurance held by the Owner as Fiduciary.
![Page 97: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/97.jpg)
Indemnity Clauses
• Broad– All losses arising out of the contract
• Middle– All losses from Contractor’s performance – less
Negligence of Owner• Limited
– Losses caused by Contractor’s negligence
![Page 98: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/98.jpg)
Insurance
• Builder’s Risk– Who Buys?– Who is insured?– What does it cover?
• CGL
![Page 99: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/99.jpg)
Insurance
• Professional liability– Not just for the architect anymore.
• Pollution• CCIP/OCIP
– Controlled Insurance Program
![Page 100: Architecture, Engineering & Construction Seminar - 2015](https://reader035.vdocuments.us/reader035/viewer/2022062901/58f17d391a28abea618b456b/html5/thumbnails/100.jpg)
Managing Insurance Risk
• Coverage Gaps• Additional Insured's