INTERNAL ● TRANSFERS 1

Internal Transfers

Convert ownership into financial independence

… an inside view

INTERNAL ● TRANSFERS 2

Employees Family Co-Owners Outside

[Retire] Outside [Continue] Public

Charitable Trusts

T R A N S F E R M O T I V E S

T R A N S F E R M E T H O D S

ESOPs Management

Buyouts/Ins Phantom Stock Stock Appre- ciation Rights

Charitable Remainder

Trusts Charitable

Lead Trusts Dynasty

Trusts

Outright Gifts SCINs Annuities GRATs FLPs IDGTs

Negotiated One-Step Private Auctions Two-Step Private

Auctions

Consolidate Roll-ups Buy and Build Recapitali- zations

Initial Public Offerings

Direct Public Offerings

Reverse Mergers

Going Private

INTERNAL TRANSFERS

EXTERNAL TRANSFERS

Buy/Sell Russian

Roulette Dutch

Auction Right of

First Refusal

T R A N S F E R C H A N N E L S

Business Transfer Spectrum

INTERNAL ● TRANSFERS 3

Owner Transfer Motives

Private owners want to:

● Create a family legacy

● Change lifestyle

● Empower employees

● Diversify estate and “equalize heirs”

● Give to charity

● Use transfer to create liquidity

● Leave door open to possible future external transfer

INTERNAL ● TRANSFERS 4

Transfer Market Timing

Ten Year Transfer Cycle

Deal Recession Prime Selling Time Almost Recession (Buyer’s Market) (Seller’s Market) (Neutral Market)

1 3 8 10

INTERNAL ● TRANSFERS 5

The Choice of Transfer Method Matters

● Employee Stock Ownership Plans (ESOPs) and most estate planning methods select fair market value

● Management Buyouts select investment value

● Phantom stock and co-owner transfers select whatever the creators dictate

INTERNAL ● TRANSFERS 6

ESOPs

● Employee Stock Ownership Plans are defined-contribution, tax-qualified plans

● ESOPs can borrow money to buy stock of a private company. (P&I on loan is tax deductible to company)

● Owners can sell part or all of the stock to an ESOP on a tax-deductible basis (no capital gains if > 30% for a C corporation)

● Can be sold in stages (multiple transactions)

INTERNAL ● TRANSFERS 7

ESOPs (Cont’)

● C or S corporation

● S corporation must be > 50% but no income tax on profit going forward. (Trust is a non-taxing entity)

● Combined with executive compensation plan allowsmanagement to earn stock outside the plan

● Owners can sell 100% of their stock in stages

● Owner remains in control and takes a salary until retirement

● Value world: Fair market value

INTERNAL ● TRANSFERS 8

ESOPs – Points to Consider

The Good:

Tax deferral to the Seller; Chips off the table; Minority can get out; Cash flow of company increases; Empowers

employees; Remain in control; Investment income replaces salary; Acquire competition tax advantaged

To Consider:

Dilution to owner outside the ESOP; Disclosure to employees; Annual valuations; Repurchase obligation; Added leverage; Added complexity

INTERNAL ● TRANSFERS 9

Management Transfers ( MBOs/MBIs)

● Management Buyouts (MBOs) – existing management team acquires

● Management Buyins (MBIs) – outside team acquires

● Engineering the deal (capital structure is key)

Senior; Junior; Notes; Warrants; Factoring; Deferred Compensation

● Value World: Investment value (Owner value would be nice)

INTERNAL ● TRANSFERS 10

Mgt. Trans.– Points to Consider

The Good:

Management is knowledgeable of the business; empowers employees; informs them of your intent;

you can remain on the BOD

To Consider:

Owner loss of effective control; dependent on future corporate cash flow; subject to market interest rates; business is bought with “after tax dollars”; added leverage; financial ties to the company

INTERNAL ● TRANSFERS 11

Phantom Stock

● Focus management on value growth

● Create “golden handcuffs” for qualified management

● Used to attract and retain quality management

● Retain ownership of stock

● Change in control provision (pays management on sale)

● You control vesting schedule for each individual

● Value world must be consistently applied

INTERNAL ● TRANSFERS 12

Phantom Stock– Points to Consider

The Good:

Retain ownership of stock; Motivates management; Based on incremental future value growth; Attract and retain quality management;

To Consider:

Creates an unrecorded & unfunded future liability; Goes not solve your transfer issues; Share future profits; Management takes no financial risk; Periodic valuations required; Management may not respond; Limits on deductibility to the company

INTERNAL ● TRANSFERS 13

Charitable Remainder Trusts

● Donor gifts C corporation shares to a CRT (some or all of the stock – no prearranged sales)

● Gifting generates a charitable gift deduction

● The trust is a non-taxpaying entity (no capital gains on sale – math on Page 361 of Private Capital Markets)

● Donor lives off of distributions; can use a wealth replacement trust to take care of kids; upon death the principal reverts to one or more charities

● Value World: Fair market value

INTERNAL ● TRANSFERS 14

CRT– Points to Consider

The Good:

Receive income tax deduction subject to limitations; Removes future appreciation from estate; Deduction based on current stock value; Can be less than 100% of your ownership

To Consider:

Only works for C corporations; Does not solve your transfer issues; Asset in the trust is not liquid;

Dividends outside the trust are subject to double taxation; Charity may receive stock in your company

INTERNAL ● TRANSFERS 15

Family Transfers

● There are a large number of ways to transfer the business to family members

● Acronym soup: SCINs, GRATs, FLPs, IDGTs, etc.

● Or you can just give stock away

● Realizing your dreams: perhaps one part family transfer; one part market transfer

● Value World: Fair market value

INTERNAL ● TRANSFERS 16

Combination Combination StrategiesStrategies

Using more than one approach to Using more than one approach to realize your motives!realize your motives!

INTERNAL ● TRANSFERS 17

Combination Strategies

Phantom Stock Options & Acronym soup

CRT & MBO/MBI

S Corp. Equity Recap & Dynasty -QSSTrust

Executive Compensation & ESOP

CRT & ESOP (remember, no prearranged sales; internal or external)

INTERNAL ● TRANSFERS 18

Combination Strategy– Points to Consider

The Good:

Begins the Process of equity transfer; Does not preclude the business from external transfer; Provides asset protection; Can motivate management

To Consider:

All the “to consider” items previously discussed; Adds complexity to your life; Advisory team must understand your motives; Difficult to coordinate advisory team

INTERNAL ● TRANSFERS 19

Owner Motives Matter Most

● Don’t let your advisors promote their motives or belief systems

● It’s your goals that need to be met!