1. Transitioning Ownership to an Insider
Bob Zarlengo, CPA/ABV, CVA, CExP

2. Plan – Prepare – Execute
Exit planning: Plan, Prepare, Execute
Today’s discussion:
Important Facts About Small Business Ownership and Exiting
Overview of the Exit Planning Process
Transitioning Ownership to an Insider
It’s the single largest financial transaction of your life!

3. Some Important Facts
75% of business owners in businesses with $5-150M in sales plan to exit that business in the next 10 years.
$15 trillion in closely-held-business net worth will transfer in the next 15 years.
25% of business owners will exit their businesses successfully.
What does your exit picture look like?

4. What You Need to Know
Of the 5.68M businesses in the US with fewer than 500 employees – 99.7% have less than 20 employees
Over-supply of companies = depressed values
Most companies will end up in liquidation

5. Why You Need to Know It
A “well-executed plan” usually increases the value of the business because the owner is focused on the process
Planning is the key – you can write your own future
The process takes longer than you think (it’s not like selling your house!)

6. Do you want to drive the bus?
Every business owner will exit his/her business some day.
Do you want to drive the bus?

7. Your Exit Plan The next questions to ask are: Should I start planning?
How do I begin?

8. Should You Start Planning?
Yes, if you can answer “yes” to any of these questions:
You are between 45 and 55 years old and control all or nearly all of the ownership interest
Your personal net worth is tied closely to the value of the company
Your business has $3-5M minimum in annual sales and more than 15 employees
Your business has a management team in place

9. An Overview of Exit Planning
Establish a Value
Review Value Drivers
Determine the GAP
Develop the Plan
Execute!

10. The 7-Step Exit Planning Process
Step 7: Personal Wealth & Estate Planning
Step 6: Business Continuity
Step 5: Ownership Transfer to Insiders
Step 4: Ownership Transfer to Third Parties
Step 3: Maximize & Protect Business Value
Step 2: Quantify Financial Resources
Step 1: Identify Exit Objectives

11. What to Know: the First 3 Steps
Step 3: Maximize & Protect Business Value
Step 2: Quantify Financial Resources
Step 1: Identify Exit Objectives
Identify your current resources
Know what annual after-tax income you want in retirement
Know who the business will transfer to
Establish current business value
Understand the Gap
Have a plan

12. A Key Question Who will the business transfer to?
Step 3: Maximize & Protect Business Value
Step 2: Quantify Financial Resources
Step 1: Identify Exit Objectives
Identify your current resources
What annual after-tax income do you want in retirement?
Who will the business transfer to?
Establish current business value
Understand the Gap
Have a plan

13. Who Will The Business Transfer To?
Step 5: Ownership Transfer to Insiders
Step 4: Ownership Transfer to Third Parties

14. Who Will The Business Transfer To?
Step 5: Ownership Transfer to Insiders
Step 4: Ownership Transfer to Third Parties
Our focus for today

15. Ownership Transfer to Insiders
Benefits to the Owner:
Achieves exit objective
Motivates and retains key employees
Reduces risk
Increases amount of money received
Control of exit terms
You are the banker

16. Ownership Transfer to Insiders
Types of insiders:
Family Members
Key Employees

17. Ownership Transfer to Insiders
Your Personal Assessment
We ask 8 questions in this phase
Yes/no answers
Rate how important the issue is to you:
0 = N/A
1 = Not Important
2 = Somewhat important
3 = Important
4 = Very Important
5 = Critical
Follow Along on Your Handout!

18. #1: Payment
Are you comfortable in the ability of insiders to pay you what you want for the company?
0 = N/A
____ Yes 1 = Not important
2 = Somewhat important
____ No 3 = Important
4 = Very important
5 = Critical

19. #2: Means to Pay
Are you comfortable with the means (loans, cash, carry-back notes) insiders will use to pay you for your ownership interest?
0 = N/A
____ Yes 1 = Not important
2 = Somewhat important
____ No 3 = Important
4 = Very important
5 = Critical

20. #3: Risk-Free
Are you confident that your plan to transfer your company to insiders is as risk-free as it can be and involves paying the minimal amount of both income and gift taxes?
0 = N/A
____ Yes 1 = Not important
2 = Somewhat important
____ No 3 = Important
4 = Very important
5 = Critical

21. #4: Tax Efficiencies
Have you maximized tax efficiencies in connection with your exit by leveraging qualified retirement plans and/or Non-Qualified Deferred Compensation plans?
0 = N/A
____ Yes 1 = Not important
2 = Somewhat important
____ No 3 = Important
4 = Very important
5 = Critical

22. #5: Buy-Back Agreement
Is a buy-back agreement in place to control the interest held by minority owners?
0 = N/A
____ Yes 1 = Not important
2 = Somewhat important
____ No 3 = Important
4 = Very important
5 = Critical

23. #6: Tax Liability
Are you aware of planning strategies that can transfer your business to insiders while incurring minimal tax liability and meeting your financial needs?
0 = N/A
____ Yes 1 = Not important
2 = Somewhat important
____ No 3 = Important
4 = Very important
5 = Critical

24. #7: Family Succession
Is your company free of any family succession concerns?
0 = N/A
____ Yes 1 = Not important
2 = Somewhat important
____ No 3 = Important
4 = Very important
5 = Critical

25. #8: Ownership Knowledge
Does your successor have the necessary skills and knowledge to participate in ownership of the business?
0 = N/A
____ Yes 1 = Not important
2 = Somewhat important
____ No 3 = Important
4 = Very important
5 = Critical

26. What to do with your results
Your Personal Assessment
Enter your results on our online assessment
(Available for all 7 steps of the planning process)

28. Identifying the Right Insider
3 Key Qualities
He/she has a direct and significant impact on the value of the business
His/her combination of skills and experience would be very difficult to replace
He/she will participate in a meaningful way in the strategic future of the company

29. Identifying the Right Insider
Other things to consider:
Does the insider reflect the needs of the business’ future?
Can this person build upon what you’ve done/take it to new heights?
Have you had ample time to observe them in action?
What are their strengths?
Where are the gaps? Can they obtain the knowledge they need?
Open discussion: What are other things you might consider?

30. 6 Transition Strategies
Bequeath the ownership
Gift the ownership
Sell ownership units
Bonus the ownership
The “Popeye” Plan
Oldco/Newco Plan

31. But first . . . some context 3 Levels of Business Valuation Reports
“Cadillac”
Full-blown report on valuator’s letterhead, within IRS guidelines
“Oldsmobile”
Greatly-reduced report with scope restrictions; on valuator’s letterhead
“Chevrolet”
Worksheet version with baseline

32. #1: Bequeath the Ownership
PROS
CONS
Easiest choice: amend your Last Will and Testament
Requires “Cadillac” business valuation
Estate receives no monetary payment for the value of your company

33. #2: Gift the Ownership Accomplish the transfer during your lifetime
PROS
CONS
Accomplish the transfer during your lifetime
Typically accompanied by a deferred comp agreement to the donor and/or spouse
More than likely requires a “Cadillac” business valuation
Estate receives no monetary payment for the value of your company
No step-up in basis on those who receive ownership units

34. #3: Sell the Ownership Units
PROS
CONS
Accomplish the transfer during your lifetime
You are no longer in charge of the company
May require financing it
You are tied to company’s success
You have all risks and no rewards
Step-up in basis to the price of the ownership units

35. #4: Bonus the Ownership Accomplish the transfer during your lifetime
PROS
CONS
Accomplish the transfer during your lifetime
Company grows in value
Cash payout
Only one level of taxation
KEG has to earn ownership (set metrics in advance)
Plan will require an annual valuation – the “Chevrolet” version

36. #5: The “Popeye” Plan Accomplish the transfer during your lifetime
PROS
CONS
Accomplish the transfer during your lifetime
No valuation costs
You draw all accumulated equity over the life of the plan
Must have 10 years’ consistent earnings; converted to cash on a regular basis & distributed
Company is cash poor
Those acquiring stock will have little basis in the stock

37. #6: Oldco/Newco Plan Accomplish the transfer during your lifetime
PROS
CONS
Accomplish the transfer during your lifetime
No valuation costs
Cost of maintaining 2 companies
May be subject to greater IRS scrutiny
Oldco
Newco

38. Communicating the Decision
Have a written plan
Discuss with your advisor who you should share the plan with
Detail evolving leadership roles for the founder and successor
Communicate in person and regularly with the key staff so there are no surprises

39. The 7-Step Exit Planning Process
Step 7: Personal Wealth & Estate Planning
Step 6: Business Continuity
Step 5: Ownership Transfer to Insiders
Step 4: Ownership Transfer to Third Parties
Step 3: Maximize & Protect Business Value
Step 2: Quantify Financial Resources
Step 1: Identify Exit Objectives
Once you’ve mapped out your transfer plan, you’ll move on to steps 6 and 7 in the Exit Planning Process.

40. Business Continuity Planning
Benefits to the Owner:
Objectives can be achieved if you don’t survive your exit
Ownership and control of your company is retained if co-owner departs
Consistency between lifetime and death objectives
Ensures survival of the business for the benefit of others

41. Business Continuity Planning
Benefits to the Owner:
The business is the single largest asset of the business owner
Preserve wealth, minimize taxes
Integrates lifetime exit objectives with estate plan
Estate planning becomes part of business planning

42. Planning Your Exit
Exiting your business is the single most important financial event of your life
The best way to handle this is to plan early!
Maximize your price and minimize taxes
Find the right successor for the transition

43. How to Start Identify your exit date
Define short-term and long-term goals
Identify your team
Clarify your objectives and create the plan

44. How I Can Help
Take the online assessment at rjzinc.com/exit-planning-assessment/
Meet with me in person or via Skype for an hour to review:
Your assessment
Exit readiness
Ability to achieve exit according to your goals
What it would take to put a plan together

45. Join Us! Owner Exit Planning Board
WHO: A Board of business owner peers
WHEN: Bi-monthly meetings
WHAT:
Meet with peers to discuss ideas and challenges in the exit planning process
Discussions facilitated by Bob Zarlengo
Board participants will receive one hour individual consultation with Bob every other month
Interested in learning more? Check off the box on the evaluation to receive more information.

46. Questions?

47. Thank You!
Bob Zarlengo, CPA/ABV, CVA, CExP Robert J. Zarlengo, Inc West 44th Avenue, Suite 101 Wheat Ridge, CO