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Business Facts Quiz

Why Is Exit Planning So Important?

Presented By:

Richard StopaCalder Associates

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Business Facts Quiz

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Business Quiz Answers

• 65% of Business Owners Don’t Know the Value of Their Business

• 85% of Business Owners Don’t Have an Exit Plan

• Majority of Business Owner’s Total Assets are Tied up in their Company

• Do You Fit Into One of These Categories?

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Estimated Number of Privately Held Businesses Owned By Baby Boomers

12 Million

Why is this important to even

non-baby boomers?

Competition For Business Buyers

The Boomer Effect

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The Reality

Privately Held Business With Sales of $500K to $25M

25% Privately Held Businesses That Are “For Sale” That Actually Sell

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Why?

Why Only 25%?

• Unrealistic Expectations

• Business Isn’t Marketable

• Lack of Expert Advice

• No Concrete Exit Plan

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What Buyers Look For?

aka: “Value Drivers”

• Verifiable financial statements

• On-going and sufficient cash flow

• Recurring revenue

• Quality reputation

• Proper operational controls and IT infrastructure

• Solid key management and well-trained

employees

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What Buyers Look For?

• Customer/supplier contracts• Established customers and sales in pipeline• Established suppliers and credit• Existing licenses, permits and intellectual

property• Training and support by the seller, post

closing• Existing location

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Valuing A Business

Common Methods to Value a Business

1. Valuation Based Upon Cash Flow

2. Market Method

3. Asset Method

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The Multiple Game

Why Plan Your Exit Strategy Now?

Create future value for yourself

Play the multiple game – turn one dollar into three, four or five!!!!

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Typical Transaction Process

• Months 1–2: Planning

• Months 2–6: Searching

• Months 6–7: Deal Making

• Months 7–9: Closing

• Month 10: A tropical island….

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Your Advisory Team

Business Owner

CPA

Commercial Bank

Wealth Mgmt. Advisor

Tax AttorneyEstate &Trust Attorney

Transaction Attorney

Business Broker, M&A Specialist

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Sale Considerations

Presented By:

Joe Mastaler, CPAWitt Mares, PLC

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Your Silent Partner

• The governments– Run the numbers

• Capital gains versus ordinary income on an individual level

• Personal income versus capital gains

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Understanding What You Are Selling• Stock– Know your basis

• Ownership interests• Assets– Identifiable and agree on the assets selling

• Know your basis and the tax treatment• Include patents, trademarks and/or copyrights or keep and

receive royalty fees

– Intangible• Purchase price above the fair market value of assets sold• Goodwill and going concern• Non-compete agreements 16

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Business Entity Type

• Sole Proprietorship• Partnerships/Limited Liability Entities• Corporations– "S" Corporations– "C" Corporations• Most tax disadvantage on the sale so planning is

important– Double taxation possible

– Deferred compensation payouts

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Competing Interest Between The Buyer & Seller

• Buyers generally want to buy assets• Sellers want to sell stock

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Does Less Mean More?Tax Impact Of The Sale

• Structure of transaction could mean more cash for a lesser sales price

• Allocation of purchase price– Agree to an allocation– Reporting requirements

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Considerations

• Consider the sale of a part of the business

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Timing Of The Exit

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Accounting & Tax Preparation For Successful Exiting

• Financial statements and tax return filings are up to date and timely– Type of financial statements (Compiled,

reviewed or audited)• If none of these, possible less value obtained

– All tax returns (federal, state, local, business license, property, payroll)

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Accounting & Tax Preparation For Successful Exiting

• Know your financial information– Be able to produce what a buyer asked for

quickly and accurately– What is recorded (on the balance sheet and

income statement) and what is not (contingent)– Have list of assets (furniture, equipment,

inventory, real estate) and leases commitments prepared in advance

– Expect a buyer to perform due diligence procedures

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Ways/Methods Of Sale

• Cash• Exchange• Some combination• Installment– Watch out for the traps if any– Risk of receiving the total sales price

• Earnouts– Usually based on the future success of the business but

may bring a higher overall price

• Gifting• ESOPs

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Have An Idea Of The Value Of Your Business

• Business appraisals

• Asset appraisals

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Preparing for Due Diligence

Presented By:

Kevin Learned, Esq.General Counsel, PC

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Preparing For Due Diligence

Don’t Wait for the Buyer

• Accounting• Taxes• State Registrations• Ownership• Governance

• Contracts• Affiliated Transactions• Employees/Contractors• Intellectual Property• Contingent Liabilities

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Accounting

Balance the Books

• Accounting Systems and Controls• Audited Financials– Buyers Will Require– Identify and Resolve Issues– Through Recent Calendar Quarter– Consider Auditing up to Three Years Back

• Be Prepared for Recent Financials to be Reviewed• Track Normalization Adjustments

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Taxes

Get Current with Uncle Sam

• Income• Sales and Use• Employee/Payroll• Property• Franchise

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State Registrations

Are You Qualified?

• Obtain a Good Standing Certificate– Place of Formation– Other States where Qualified

• Qualify Where Doing Business– Location of Contract Performance– Generating Sales/Income– Generally, Not Mere Solicitation

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Ownership

Avoid Loose Ends

• Update Stock Ledger and Cap Table• Document All Equity Issuances and Transfers• Document All Incentive Compensation• Clean-up Unwanted Transactions– Transfers in Violation of S Corp Restrictions– Issuances With Negative Tax Implications– Transfers/Issuances in Violation of 51%

Ownership Requirements

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Governance

You Are Selling a Real Company

• Make Sure Your Organization Documents are Updated

• Conduct Regular Board Meetings• Conduct Annual Shareholder Meetings• Adopt Current Resolutions Appointing

Directors and Officers

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Contracts

Is Everything Updated?

• Are Expired Contracts Continuing?• Amendments, Work Orders, Etc.• Identify Contracts that Require Notice or Consent• Identify Contracts With Other Transfer Restrictions

– Set-aside Restrictions

• Contracts Currently Being Negotiated– Look Ahead to a Sale

• Terminated Contracts

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Affiliated Transactions

Keep Everything Separate

• Document Agreements Between the Company and Owners or Affiliates – Loans– Leases/Subleases– Shared Services– Intercompany Transfers

• De-Personalize the Company

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Employees/Contractors

Lock Down Your Team

• Employment Agreements with Key Employees– Non-competition and Non-solicitation Provisions– Change of Control Bonuses

• Incentivize Employees to Stay With the Company– Limit Concerns With the Transition– Keep Focus on Business Operations

• Well-drafted Independent Contractor Agreements• Human Resources/Immigration Audit

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Intellectual Property

Do You Own It?

• Work for Hire• Assignment of Inventions• Patents• Trademarks• IP Audit

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Contingent Liabilities

Resolve Disputes

• Pending or Threatened Litigation• Engage Competent Counsel • Determine Amount in Dispute

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Purchase & Sale Documents

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Getting to a Deal

• Indication of Interest• Nondisclosure Agreement• Diligence Request List• Letter/Memorandum of Intent• Purchase/Merger Agreement– Disclosure Schedules– Exhibits

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Closing the Deal

• Purchase/Merger Agreement• Promissory Note and Security Agreement• Escrow Agreement• Employment/Consulting Agreement• Non-competition and Non-solicitation

Agreement• Other Ancillary Agreements and Documents

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From the Bank’s Perspective

Presented By:

Andy KalinAccess National Bank

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Two Sides To Every Transaction

• Buyer Qualifications– Show Me the Money– Financial Capacity (bank reference,

financials)– Capable of Running the Business

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• Seller Financials/Value Drivers– Business Records– Financial Records (tax returns, audited)– Valuations/Appraisals– Revised Business Plan

(value guidance)– Leases/Contracts • Assignable (affects type of sale)

Two Sides To Every Transaction

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Payment Terms – Dictate Price

• Cash = lower price• Seller Financing/Earn Out – Protects the Buyer– Banks Like– Potential Tax Benefit

• Bank Financing– Prefer Some Seller Financing or Earn out– Subordination– SBA • Stand Still on Seller Financing• No Earn Out

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Exit Strategies

• "Begin with the end in mind“– Stephen Covey

• Plan before you want to sell– Grooming the successor– Identifying key employees– Defining what a buy-out looks like at

retirement

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Exit Strategies

• The Buy-Sell Agreement– Determine the value of your company– Develop an employee benefit plan that will

assist with you (or your partners’) departure– Plan who retains ownership and who gets paid

off– Put a time line in place

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Exit Strategies

• Create a contingency plan• Fund your plan– How do you pay for the 4 D’s• Life Insurance• Disability Insurance• Agree on how to determine selling price• Financing

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Quick Update on Estate Tax

• $5,000,000 Federal gift and estate exemption– Unified system

• Top rate of 35%• Sunsets at the end of 2012– Back to $1,000,000– Top rate of 55%

• Annual gift tax exclusion is $13,000

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Case Study #1 (Retail Furniture Business)

• Sells furniture direct to consumers and businesses• S Corporation, owned 50/50 by husband and wife

– Husband and wife are close to retirement age– One adult child actively involved in the business– Two other adult children not involved in the business

• Stable annual revenue of $8-10 million for the past several years

• Owners’ net income from salary and distributions of approximately 10% of revenues

• Owners want to retire and move to Florida• Have been in business for over 30 years

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• Single retail location– Also rents warehouse space for excess inventory

• Real property owned in a separate LLC– Owned 50/50 by the husband and wife

• Key contracts in place with suppliers• Key employees

– Manager (son of husband and wife)– Marketing/Sales director– Warehouse manager– Bookkeeper (wife)

• $1 million SBA loan in place58

Case Study #1 (Retail Furniture Business)

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Case Study #2 (Architectural Services Business)

• Provides architectural services to commercial and government customers

• LLC, owned 50/35/15 by three unrelated owners– 15% owner developed software for the company and is not

currently involved in day-to-day operations

• Growing annual revenue– $4 million in 2009– $5 million in 2010– $7 million projected for 2011

• Owners’ net income from salary and distributions of approximately 20% of revenues

• Owners want to cash out and move to the next project– 35% owner willing to stay on post-sale

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• Leased office space in a single location• 60% of revenue from commercial customers; 40% of

revenue from government customers– Ten percent of revenue from a single federal subcontract

• Key employees– 50% owner generated most of the client relationships, but is

not as active in the day-to-day operations– 35% owner manages day-to-day operations– Operating Agreement in place includes non-competition and

non-solicitation provisions

• $500K line of credit in place• 401K plan in place

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Case Study #2 (Architectural Services Business)

looking ahead seminar

Documents

business license

business owners dont

business facts quizwhy

business facts quiz3

business quiz answers65

tax impact

future value

accounting tax preparation