1. Exit Planning for Business Owners Name, title, designation(s) The Principal Financial Group  Date

2. EXIT PLANNING FOR BUSINESS OWNERS BB10299-02 | 09/2015 | t1508260qnv Insurance products from the Principal Financial Group ® are issued by Principal National Life Insurance Company, Principal Life Insurance Company and the companies available through the Preferred Product Network, Inc. Securities offered through Princor Financial Services Corporation, 800/247-1737, member SIPC. Principal National, Principal Life, the Preferred Product Network, and Princor ® are members of the Principal Financial Group ®, Des Moines, IA 50392. The subject matter in this communication is provided with the understanding that The Principal ® is not rendering legal, accounting, or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements. The Principal Financial Group ® and its members are providing links to other Web sites to give you the option to explore information on financial services. The Principal ® did not create and does not claim any responsibility for the content on those pages.

3. EXIT PLANNING FOR BUSINESS OWNERS Insurance products from the Principal Financial Group ® are issued by Principal National Life Insurance Company, Principal Life Insurance Company and the companies available through the Preferred Product Network, Inc. Securities offered through Princor Financial Services Corporation, 800/247-1737, member SIPC. Principal National, Principal Life, the Preferred Product Network, and Princor ® are members of the Principal Financial Group ®, Des Moines, IA 50392. is not an affiliate of any member company of the Principal Financial Group ®. is not an affiliate of any member company of the Principal Financial Group ®. The subject matter in this communication is provided with the understanding that The Principal ® is not rendering legal, accounting, or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements. The Principal Financial Group ® and its members are providing links to other Web sites to give you the option to explore information on financial services. The Principal ® did not create and does not claim any responsibility for the content on those pages. BB10299-02 | 09/2015 | t1508260qnv

4. * 4 What is exit planning? A process resulting in your successful transition out of the business. EXIT PLANNING FOR BUSINESS OWNERS

5. Four simple steps: 1.Set priorities 2.Determine value 3.Identify inside or outside buyer 4.Assess impact to your estate THE PROCESS EXIT PLANNING FOR BUSINESS OWNERS

6.  How much longer do you want to work in the business before retiring or moving on? __________ years  What annual after-tax income do you want/need during retirement (in today’s dollars)? $________________  Who do you want to transfer the business to? o Family? o Co-owner? o Key employee? o Outside party? STEP 1: SET PRIORITIES EXIT PLANNING FOR BUSINESS OWNERS

7. Specific business owner issues:  When can I exit my business? When do I want to exit my business  Regulatory climate – economic climate  Will my kids be able to – or want to - take over?  Will it sell for what it’s worth?  How can I avoid huge taxes?  Can it survive without me?  How do I reward key employees/management team to stay? NEEDS FOR OWNERS AND EXECUTIVES EXIT PLANNING FOR BUSINESS OWNERS

8.  Retirement funds – Will I have enough?  Healthcare – How will I pay for it when I retire?  Survivor needs – What if I die too soon?  Financial security – What if I outlive my finances? CONSIDERATIONS FOR OWNERS AND EXECUTIVES EXIT PLANNING FOR BUSINESS OWNERS

9. STEP 2: DETERMINE VALUE WHO PERFORMS VALUATIONS? Business Appraisal Firms Business Brokers or Investment Bankers CPAs Financial Professionals EXIT PLANNING FOR BUSINESS OWNERS

10. VALUATION Beauty is in the eye of the buyer Value is based on reasonable expectations What are some industry standards? EXIT PLANNING FOR BUSINESS OWNERS

11.  Dental practice: A multiplier of annual net earnings plus fixtures, equipment and inventory  Law practice: 0-100% annual fee revenue, dependent on client retention  Accounting practice: A multiplier of gross annual revenues  Medical practice: A multiplier of annual net earnings, plus fixtures, equipment and inventory  Real estate agency: A percentage of gross annual commissions RULES OF THUMB EXIT PLANNING FOR BUSINESS OWNERS

12. INFORMAL BUSINESS VALUATION EXIT PLANNING FOR BUSINESS OWNERS

13.  Focus on increasing cash flow  Develop operating systems that improve sustainability of cash flows  Document sustainability of earnings  Improve facility’s appearance  Pay down debt  Solidify and diversify customer base  Implement a strategy to grow the company  Build a solid management team, and groom a successor BUSINESS VALUE DRIVERS EXIT PLANNING FOR BUSINESS OWNERS

14. THE SALE PRICE TO INCOME CHALLENGE Taxes Wealth Preservation Charitable Giving …needed to support income goal Sale Price $2MM Increase Cash Flow Increase Value Increase Return “Sale too little” – Issues and opportunities: Taxes Wealth Preservation Charitable Giving “More than enough” – Issues and opportunities to consider: EXIT PLANNING FOR BUSINESS OWNERS $4MM $6MM$8MM

15. MOTIVATING EMPLOYEES Equity Based  Stock Bonus  Stock Option  Stock Purchase Cash Based  Cash Bonus  Nonqualified Deferred Compensation  Phantom Stock Plan EXIT PLANNING FOR BUSINESS OWNERS

16. STEP 3: SALE TO INSIDERS OR OUTSIDERS Buy Sell  Stock or Assets  Cross Purchase or Redemption Capital Transfers  Compensation and Benefits  ESOP  Recapitalization Gift  Charitable  Family Common Techniques EXIT PLANNING FOR BUSINESS OWNERS

17. Is there a Key Employee who is:  Qualified  Motivated/Passionate  Financially able to buy LACK OF QUALIFIED KEY EMPLOYEES EXIT PLANNING FOR BUSINESS OWNERS

18.  Cross Purchase  Redemption/ Entity Purchase  ADVANCED: Wait-and-See, Partnership  Stock or Assets? BUY-SELL TECHNIQUES AB Business A EXIT PLANNING FOR BUSINESS OWNERS

19. Problem  Family business with non-family key employees  How to keep them in the business?  How to keep them in the business? Solution  Stay Bonus for non-family employees  Life Insurance funds the bonus NON “BUY-SELL” EXAMPLE: STAY BONUS EXIT PLANNING FOR BUSINESS OWNERS

20. Compensation and Benefits:  Consulting contract  Nonqualified Deferred Compensation  Executive Bonus with Restrictive Endorsement  Select Reward Plan  Qualified Plan CAPITAL TRANSFERS EXIT PLANNING FOR BUSINESS OWNERS

21. A qualified ESOP plan:  Creates a market for the sale of stock at Fair Market Value  Provides cash now – allows to exit later  Provides a source of liquidity for personal planning  C corporation owners – defer gain  S corporation owners – avoid tax CAPITAL TRANSFERS EXIT PLANNING FOR BUSINESS OWNERS

22.  Family-owned businesses represent 57% of the U.S. workforce. 1  Only 29% of family-owned business have business protection in place for death, disability, or termination of an owner or key employees. 2  And just 32% have written plans in place to help continue the business in the event of a death, retirement, disability, etc. 2 FAMILY BUSINESS ISSUES 1. FFI, Global Data Points, August 2015 2. 2015 Business Owner Research, the Principal Financial Group

23. SALE USING INSTALLMENT NOTE EXIT PLANNING FOR BUSINESS OWNERS Sale Price$1,000,000 Cap Gain Tax 200,000 Seller NET $800,000 Fair Market Value = $1,000,000 Cash Flow = $250,000 Buyer’s Tax Bite (40%) $100,000 Seller’s Tax Bite (20%) $30,000 Net to Seller $120,000 / yr $250,000 / yr $120,000 x 8 Years = $960,000 Timing: 8-10 years

24.  Nonqualified deferred compensation to seller  Leasing obligations between seller and the business such as a building or equipment  Licensing and royalty fees MINIMIZING INCOME TAX: MAXIMIZING DEDUCTIBLE PAYMENTS FROM BUSINESS EXIT PLANNING FOR BUSINESS OWNERS

25.  Minimize nondeductible sale price  Business cash flow is usually inside buyer’s only source of financing  Structure sale to minimize overall taxes  Increase deductible payments to seller MINIMIZE THE SALE PRICE EXIT PLANNING FOR BUSINESS OWNERS

26.  Personal guarantees by the buyer, including business and personal assets  Seller retains controlling interest in the company until financial security is assured  Seller may need to stay involved until he or she is satisfied the cash flow will continue without him or her MAXIMIZING SELLER SECURITY EXIT PLANNING FOR BUSINESS OWNERS

27.  Get partial outside financing even though this may require subordinating the seller’s security interest to bank or similar financing  Sell part of the business to an outside party  Use modified buyout method MAXIMIZING SELLER SECURITY EXIT PLANNING FOR BUSINESS OWNERS

28. SALE TO EMPLOYEE HYBRID METHOD (PART 1) EXIT PLANNING FOR BUSINESS OWNERS Fair Market Value = $1,000,000 Cash Flow = $250,000 Sell 40% to Buyer at 50% discount ($200,000) Buyer’s Tax Bite (40%) $40,000 Seller’s Tax Bite (20%) $12,000 Seller’s Tax Bite (40%) $60,000 Net to Seller $48,000 / yr Over 3.3 Years = $158,400 Net to Seller $90,000 / yr Over 3.3 years = $297,000 Buyer $100,000 / yr Seller $150,000 / yr (consulting fee) Total After 3 plus Years = $455,400

29. SALE TO EMPLOYEE HYBRID METHOD (PART 2) EXIT PLANNING FOR BUSINESS OWNERS Fair Market Value = $1,000,000 Cash Flow = $250,000 After 3.3 Years Buyer Borrows $600,000 From Bank to Buy Remaining 60% Seller’s Tax Bite (20%) $120,000 Net to Seller After 3.3 Years = $480,000 Seller Received: From 1st Stock Sale $158,400 From Salary 297,000 From 2nd Stock Sale 480,000 Total$935,400 $600,000 Loan Proceeds Timing: 3 years

30. Summary  4 steps of exit planning  Family considerations  What’s the business worth?  Exit planning many times affects your estate  Maximize value  Minimize taxes  Maximize flexibility  Put a plan in place; pre-fund, if possible EXIT PLANNING – THE PROCESS EXIT PLANNING FOR BUSINESS OWNERS

31. Q&A Questions? EXIT PLANNING FOR BUSINESS OWNERS

32. THANK YOU Presenter name Contact info - phone Contact info – email Contact info - website BB10299-02 | 09/2015 | t1508260qnv