Business Owner Symposium

March 2012

Welcome & Symposium Overview

Kevin Donovan

Key Private Bank

Objective: Help business owners make wise financial decisions.

Obstacle: Complexity – No one person or organization can be an expert on everything.

Proposed Solution: Extensive team of specialists in a wide range of business & personal financial issues.

Business Owner Symposium

Business Owners & Exit Plans

52%

39% 39%43%

0-3 Yrs 4-6 Yrs 7-10 Yrs 10+ Yrs

Business Owners with a Succession Plan (May 2010)

Years Until Exit: % of Business Owners With a Plan

41% Have a Succession

Plan59% Have No Succession

Plan

Dangers of Not Having a Plan

• Leave money on the table at sale• Not able to afford the lifestyle you’d like in retirement• Pay too much money in taxes• Inability to create the legacy that you would like

A study of 300 former business owners who recently sold their companies showed that 75% of them felt the sale did not accomplish their personal or financial objectives.

Initial Financial Planning Considerations

Chris Fout, CFP®

Senior Financial Planner

Key Private Bank

Financial Philosophy

“He who fails to plan, plans to fail.”

Initial Financial Planning Considerations

1. Cost of Living – How much money does it take for you to live currently, and how much do you anticipate you will need in retirement?

2. Business Transition – How? When? To whom?

3. Net Worth – Personal financial information including assets, liabilities, and future inflows/outflows.

Personal Retirement Planning

• How much do you need to “net” from the sale of your business to be financially independent?

• How does this number (above) compare with a current business valuation?

• Prior to any consideration of a sale, it is crucial to know both what you need and what your business is worth.

Personal Retirement Planning

Example: Bob and Susan• Own a large hardware store• Want to sell the business• Spending need is $120,000• Higher expenses in the first 5 years for travel and a

remodel of their vacation home• Have an offer for $2,500,000• Additional savings of $500,000

Today's Dollars

Year ofRetirement

Annual retirement spending goals $ 120,000 $ 120,000

Total resources needed to fund goals $ 4,000,216 $ 4,000,216

Maximum attainable annual retirement spending $ 90,087 $ 90,087

Total resources available to fund goals $ 3,000,000 $ 3,000,000

It is projected that your current resources will fund about 75.01% of your retirement spending goal.

Your retirement spending is projected to look like this:

Current Funding 75.01%

Shortfall 24.99%

Retirement Spending Goal (Assuming $2.5mil Business Value)

Retirement Spending Goal (Assuming $6mil Business Value)

Today's Dollars Year ofRetirement

Annual retirement spending goals $ 120,000 $ 120,000

Total resources needed to fund goals $ 4,000,216 $ 4,000,216

Maximum attainable annual retirement spending $ 192,678 $ 192,678

Total resources available to fund goals $ 6,500,000 $ 6,500,000

It is projected that your current resources will fund about 162.46% of your retirement spending goal.

Your retirement spending is projected to look like this:

Current Funding 162.46%

Shortfall 0.00%

Business Valuation

Lance Fenton, CPA, CVAPartner

Cooper Norman

Business Valuation

• Purpose of a Valuation• Tax versus Non-Tax

• Valuation Methods• B/(R-G)=V

• B = Benefit Stream• R = Risk• G = Growth Rate• V = Value

• The Valuation Process

Business Valuation

The Sellable Business

David C. Smith

Maximizing the Value of Your Business

High growth prospects Larger company size Long, successful track record Steady earnings growth Management succession in place Diversified customer / supplier base Unique product or service

Low growth prospects Small company size Minimal financial history Volatile earnings Management succession in doubt Concentrated customer / supplier base Generic product or service

WHAT DOES A POTENTIAL BUYER WANT?

VALUE

VALUE

Sellability

Is your business “sellable”?

GrowthProfit-ability

Sustain-ability

Risk

Sellability: Growth

Action: Identify strategic areas of growth (i.e. acquiring new customers, complimentary products / services, new locations)

19

GrowthProfit-ability

Sustain-ability

Risk

Action: Create and manage the systems in your business that produce consistent results and increase effectiveness.

20

Sellability: Profitability

GrowthProfitability

Sustain-ability

Risk

The One Thing…..

21

Sellability: Profitability

GrowthProfitability

Sustain-ability

Risk

Growth

22

Sellability: Sustainability

GrowthProfit-ability

Sustain-ability

Risk

Action: Identify and implement key systems. Ensure business assets can transfer to new owner.

23

Sellability: Risk

GrowthProfit-ability

Sustainability

Risk

Action: Review financial, legal, environment, competitive, and industry risk and implement mitigation plans.

Exit Strategies

Denver • Boise • Boston • Burlington • Chicago Greenwich � Newport Beach Pittsburgh San Francisco • Washington DC � �

• West Palm Beach

Thomas H. McConnellDirector

Overview

Privately owned, multi-disciplinary investment banking firm.

The leading firm for serving the private wealth industry in North America, working with entrepreneurs and business owning families, in partnership with:

National footprint; global reach

Over $15 billion of middle market deals and over $75 billion of deal experience.

Extraordinary debt and equity capital market access for private companies; broadglobal reach for buyer and seller access.

DEAL OF THE YEAR INVESTMENT BANK

OF THE YEAR

- Bank of America / Merrill Lynch- Barclays Wealth- Credit Suisse

- Deutsche Bank- Goldman Sachs- UBS

NATIONAL FOOTPRINT, GLOBAL REACH

West Palm Beach

ChicagoWashington DC

PittsburghGreenwich

BostonBurlington

DenverNewport Beach

San FranciscoBoise

Mexico City

Bogota

Rio de Janeiro

Johannesburg

MadridBarcelona

Bologna

London

MilanParis

S- Hertogenbosch

Stockholm

FrankfurtWarsaw

Moscow

IstanbulLyon

Torino

Bilbao

San Sebastian

Nottingham

Birmingham

Bangalore

Mumbai

Melbourne

Tokyo

New Delhi

Kolkata

Mauritius

International/Cross-Border

Deal of the Year

North America: 11 offices 70 bankers

Internationally: 30 offices in 17 countries 170

bankers

Headwaters MB

Investment Banking

Integrated Business Services

Headwaters Capital

Partners

Family Office Direct Investment

FULL SERVICE INVESTMENT BANK AND ADVISOR

• Investment banking and advisory services for middle market companies seeking liquidity for owners, capital for growth, or advice on value enhancement and transitioning through generations

• Proprietary capital for private companies in upper middle market across all industries

Services Capital

THE TRANSITION WAVE 2011-2025

During the next 15 years, the private owners of 83% of middle market companies will either have to decide to transition their companies to the next generation of owners / executives or to monetize their ownership interests and turn over succession management and business transition to a new owner.

This represents over 40,000 companies (revenue $25mm+) with roughly $5 trillion of enterprise value.

IMPROVING ECONOMIC CONDITIONS IN THE U.S.

PRIVATE EQUITY DRY POWDER

Source: Thomson Reuters: Thomson One

Approximately $450 billion in equity capital

4,300 private equity investments are now at least 3 years old

Median time from buyout to exit is 4.8 years

Most prevalent in business products and services, consumer products and services, IT, and healthcare, Also invested in financial services, energy and materials and resources.

PRIVATE EQUITY IS UBIQUITOUS

Source: Pitchbook

STRATEGIC BUYERS CASH RESERVES

Source: Bianco Research LLC

IMPROVING LENDING ENVIRONMENT

Source: GF Data

John WilliamsonKey Commercial Bank

Credit Market Update

• Credit is available

• Consider Risk vs. Reward and set realistic expectations with your credit partners

• Structure is crucial

• There is more to a credit deal than price

• Credit partners / advisors are essential

• There is a difference between a Banker and a Lender• Banks can and should work with non bank providers of credit• Relationships are built over time

HIGHER MULTIPLIES FOR LARGER COMPANIES

Source: FactSet

Valuation Gap- Today’s market: Robust

demand for high quality/prepared companies

- 11% price premium

HIGHER MULTIPLES FOR PREPARED COMPANIES

Source: GF Data Resources

TOTAL US M&A DEAL VOLUME

Source: GF Data

What Happened in 2011?

- Economic uncertainty

- European debt crisis

- Political and regulatory uncertainty

- Slower improvement in middle market vs. multinationals

Why Things Will Pick-Up in 2012/2013:

- Improving economy

- Renewed optimism (reflected in stock and bond prices)

- Anticipated capital gains tax increases in 2013

- Presidential election will help resolve political uncertainty

- PEGs pressured to deploy capital (use it or lose it)

- Moderate GDP growth=> strategic need acquisitions to achieve growth targets

- Supply/demand imbalance

- Baby boomer exits

CURRENT MARKET CONDITIONS

STRATEGIC BUYER VS. PRIVATE EQUITY

THE RE-EMERGENCE OF THE PRIVATE EQUITY BUYER

EV/EBITDA for Private Equity vs. Strategic Buyers

Source: Capital IQ

How to decide?- Determine your transactional goals and objectives (financial and nonfinancial)

• Seeking partner or near term exit?- Evaluate the probable level of private equity interest

• Profit margins (EBITDA)• Growth prospects• Differentiated product or service offering• Platform or add-on• Reviewed or audited financial statements• Management team

- Evaluate the probable level of strategic interest• Complementary customer base• Complementary geographic areas (could allow entry to new market or be

overlapping)• Potential for economies of scale (cost savings)• New product lines or access to new technology

- Go to market and choose based on empirical data

PRIVATE EQUITY VS STRATEGIC BUYER

PROCESS ALTERNATIVES

PROCESS

Day1 30 60 90 120 150 180

Key Events

Pre-Marketing PhaseInitial Diligence

Preparation of Confidential Memorandum "CM"

Creation of Buyer List

Finalize Teaser and NDA

Contact Potential Buyers, Negotiate and Execute NDAs

Preparation of Online Data Room

Marketing Phase

Distribution and Review of CM

Preparation of Management Presentation

Rehearse Management Presentations

Receive / Evaluate Initial Indications of Interest

Purchase Agreement "PA" Prepared and Distributed

Buyer Diligence and Data Room Access

Management Presentations

Respond to Continued Diligence Inquiries

Closing PhaseReceive and Evaluate Final Indications of Interest

Negotiate with Lead Parties and Conclude Due Diligence

Execute SPA

Satisfy Regulatory, Administrative and Consent Requirements

Closing

Pre-Marketing Marketing Closing

Income Tax Considerations When Selling

Lance Fenton, CPA, CVA

Cooper Norman

Tax Brackets

Tax Rates

Corporate Income Tax Rates

If taxable income… …tax is… …of amount over

$0 - $50,000 15% $0

$50,000 - $ 75,000 $7,500 + 25% $50,000

$75,000 - $100,000 $13,750 + 34% $75,000

$100,000 - $335,000 $22,250 + 39% $100,000

$335,000 - $10,000,000 $113,900 + 34% $335,000

$10,000,000 - $15,000,000 $3,400,000 + 35% $10,000,000

$15,000,000 - $18,333,333 $5,150,000 + 38% $15,000,000

Over $18,333,333 $6,416,667 + 35% $18,333,333

Personal service corporations taxed at flat 35% rate.

What Type of Entity Do You Use To Conduct Business?

• Pass-through Entities• Sole proprietorship• Partnership• Limited liability company (“LLC”)• S corporation (BEWARE BUILT-IN GAINS!)

• Pass-through entities offer more flexibility in negotiating the terms of the sale.

• C corporations can trigger double taxation upon the sale of business assets and subsequent distribution to owners.

What Do You Have to Sell?

Selling Assets or Stock

• Buyers prefer purchasing assets

• Sellers prefer to sell stock

Selling Assets or Stock

• Buyers prefer purchasing assets

• Tax basis = purchased price (basis step up)• Future tax deductions

• Little or no risk that they will assume any unknown seller liabilities. • Seller still owns the corporation !!

• Need to dispose of in some fashion?

Selling Assets or Stock

• Sellers prefer to sell stock • Capital gain treatment on the sale.

• In a stock sale:• Buyer gets no step-up in the asset basis• Seller often indemnifies buy against past actions

Capital Gains/ Dividends

** After 2012, dividends treated as ordinary income, potential taxed at 39%

- 25% rate still applies to RE depreciation recapture

- 28% rate still applies to Collectibles

Tax Bracket 1/1/01 – 5/5/03 5/6/03 - 2007 2008 - 2012 2013 **

10% and 15% 8%/10 5% 0% 10%

25% and above 20% 15% 15% 20%

Allocation of Purchase Price – Asset Sale

• Federal Ordinary Income Rates 15% to 35%.

• Federal Capital Gain Rates 0% to 15% (general rule)

• Which rate do you want to Pay ???

Allocation of Purchase Price

• Ordinary Income Items:• Accounts Receivable (cash basis taxpayer)• Inventory• Depreciation Recapture

• Capital Gain Items:• Land• Investments • Etc

• Seller wants price allocated to Capital Gain Items• Buyer generally like to allocate purchase price to shorter-lived

assets such as receivables, inventory and equipment.

Additional Payments to Seller – Personal Goodwill

• Buyer pays one amount for the corporate stock • Buyer pays other amounts directly to the owners for

• Consulting• Covenant not to compete• Interest• Property rentals• Intellectual property• Licenses

• Advantage to Seller is generally a disadvantage to Buyer

• Personal Goodwill • Long-term capital gain to the seller / 15 year write-off to buyer • Who owns the Goodwill – Business or Individual ??

• IRS can challenge the allocation !!!!

Installment Sale

• Installment Sales

• Earnout / Contingent Payments

• Tax Deferred Exchanges

• State and Local Tax Issues??

Sustainable Income / Wealth Preservation

Chris Fout, CFP®

Senior Financial Planner

Key Private Bank

Sustainable Income / Wealth Preservation

• How do I “get paid” after I stop working?

• Accumulation Phase (Wealth Creation) vs.

Distribution Phase (Wealth Preservation)

• Minimizing Risk

Legacy Planning

• Where do you want your money to go?• Heirs• Charitable organizations• IRS

• Determine the surplus

• The sooner the planning is done, the better the results

Questions?

Disclosures

United States Treasury Department Circular 230 Disclosure – To ensure compliance with requirements imposed by the IRS, we inform you that, unless expressly stated otherwise, and U.S. Federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under Internal Revenue Code of (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

IRS Circular 230 notice: Any tax advice contained herein was not intended or written to be used, and cannot be used, by you or any other person (i) in promoting, marketing or recommending any transaction, plan or arrangement or (ii) for the purpose of avoiding penalties that may be imposed under federal tax law.