Ownership Transition Overview of 4 Ownership Models: 3 rd Party, Management Buyout, ESOP and Family.
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Transcript of Ownership Transition Overview of 4 Ownership Models: 3 rd Party, Management Buyout, ESOP and Family.
![Page 1: Ownership Transition Overview of 4 Ownership Models: 3 rd Party, Management Buyout, ESOP and Family.](https://reader036.fdocuments.us/reader036/viewer/2022062421/56649cd85503460f949a0adf/html5/thumbnails/1.jpg)
Ownership Transition
Overview of 4 Ownership Models:3rd Party, Management Buyout, ESOP and Family
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Overview
• Identify Why Planning For Ownership Transition Is Important
• Identify Transition Options Available, And Discuss The Pros And Cons Of Each
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Ownership Transition Process
Understanding That Options Are Available
Identifying Appropriate Transition Options
Evaluating Those Options
Selecting The Right
Option
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Why Plan For Ownership Transition
• To Determine Whose Interests Need To Be Considered
• Anticipate Liquidity Issues Facing Owners
• Reduce Estate Tax Liability• Impacts Cash Flow Available For
Retirement• Impacts Net Amount Available For Heirs
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Why Plan For Ownership Transition
• Impacts How You Organize And Operate Your Company – Are You Too Busy Tending To Day To Day Business
• Proper Planning Will Save Time And Money During A Business Succession Event
• Issues Apply To All Types Of Business Succession Transactions
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Mistakes To Avoid
• Put Off Or Avoid Decisions (Ostrich Approach)
• Assume Insurance Will Take Care Of Everything
• Assume All Companies Are Saleable• Pre-Conceived Ideas Without
Considering All Possible Options
• Transferring Ownership To The Wrong People
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When To Start Planning
• How Early Should You Begin Thinking About Transition
• Is Now The Right Time To Transfer Ownership
• Planning Saves Taxes
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Exit Strategy Considerations
• Market Conditions• Maximization Of Value• Sentimental Attachment To The
Company, Or To The Employee Base
• Potential For A Family Member To Manage The Company
• Are There Family Issues That Need To Be Considered
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Why Valuation Is Important
• Critical Component Of Planning Process• Provides Business Owners A Reality
Check• Helps Identify Value Drivers And Value
Detractors
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Internal Transition Options
• Transition Within The Family• Management Buyout• Employee Stock Ownership Plan• Hire A CEO To Run The Company
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External Transition Options
• Third Party Sale• Recapitalization• Sale of Minority Interest• Initial Public Offering
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Third Party Sale
• Advantages– Capture Real Value Of Company– Able To Exit The Business Cleanly– Create Career Opportunity For Employees
• Disadvantages– Lengthy Process– Due Diligence And Negotiation Process Can Be
Stressful– Potential Post-Transaction Contingencies
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Third Party Sale
• Financial Buyers– Individual Investor– Private Equity Group
• Strategic Buyers– Related Industry/Sector– Competitor– Portfolio Company Owned By A Private Equity
Group
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Third Party Sale – Strategic Buyers
• Pros– Synergies Available– High Multiples Available– Do Not Always Need Management Talent– Can Deliver Requirements For Growth (i.e.
Capital, Markets, Technology)– Will Often Entertain Earnouts– Provides Career Path For Management And
Employees
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Third Party Sale – Strategic Buyers
• Cons– Slow To Do A Transaction– Integration Can Be Painful– Do No Expect To Stay Long– Upside In Deal May Be Tied To The Overall
Acquirer– Process May Be Painful– Shares In Acquirer May Be Restricted– Employees And Business Can Be Lost
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Third Party Sale – Financial Buyers
• Pros– Can Close Deal Quickly– Informal But Quick Responses– Opportunity To Stay Involved And Have Upside– Management And Employees Can Get Options– Business Will Retain Its Identity
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Third Party Sale – Financial Buyers
• Cons– Want A High Rate Of Return – Results In A Lower
Price– Very Driven – Slow Life Gone– Require Exit Strategy– Possible Loss Of Control– Non Performing Friends And Family Employed
Are Threatened
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Third Party Sale
• Deal Structure– Merger– Stock Sale– Asset Sale
• Corporate Status– C Corporation– S Corporation
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Third Party Sale - Expectations
• Price• Terms• Structure• Timetable• Fees
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Third Party Sale - Consideration
• Forms Of Consideration– Stock– Cash– Notes– Combination
• Buyer Protections– Earnouts– Holdbacks– Escrows– Indemnifications
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Family Transition
• Advantages– Keeps Business In The Family– Parents Can Be The Banker
• Disadvantages– Be Sure Children Can Run The Company– IRS Issues
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Family Transition• Gifting Or Bequests– Family Limited Partnerships (FLPs)– Limited Liability Companies (LLCs)– Closely Held Stock (Voting, Non-Voting)
• Sale Of Assets Or Stock• Transfer To Family Members– Fair Market Value And Terms– Adequate Disclosure– Valuation Discounts
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ESOPs• Advantages– Can Be Done In Stages (Less Leverage)– Transition Of Financial And Management Control
Can Be Made Independently– Draws On Pre-Tax Cash Flow– Capital Gains Taxes Deferral
• Disadvantages– Perceived Complexity– QRP Restrictions
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ESOPs – Why Sell
• Begin The Diversification Process• Reward Employees For Their Efforts• Philosophical Belief In Employee
Ownership• Take Advantage Of The Tax Benefits• Excellent Opportunity For Estate
Planning After Transaction Is Completed
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ESOPs
$
$ StockStock
Shareholders
ReinvestQualified
ReplacementProperty
Company
Lender
ESOP
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ESOPs
Loan
Loan
#
1#
1
Repayment #1Repayment #1
Repayment #2Repayment #2
Loan #2Loan #2
Lender
Company ESOP
Rep
aym
eR
ep
aym
en
t #3
nt #
3
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ESOPs
• Benefits To Shareholders– Ready Market To Sell All Or A Portion Of Their
Stock (Always A Stock Deal)– Tax-Free Rollover Of Sales Proceeds– Maintain Control Of Corporation, If Desired
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ESOPs
• Benefits To The Company– Increases Productivity– Repay Principal Portion Of Debt With Pre-Tax
Dollars– Prepay Loan With Tax Deductible Dividends– Increases Cash Flow– Exclusion Of Federal Income Taxes (S
Corporations Only) – Keeps Company Rooted In The Community
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ESOPs
• Benefits To Employees– Own A Piece Of The Company And Share In The
Company’s Growth At No Cost To Them– Improves Morale– Account Balances Grow Tax Free– Can Diversify Accounts, If Desired
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Management Buyout
• Advantages– Uses Corporate Assets And Earnings To Finance
The Transaction– Diversification For Shareholders– Continuity Of Management
• Disadvantages– Balance Sheet Stress– Owner Will Not Receive Highest Price– Management Will Need To Bring In Equity
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Management Buyout
• Description Of Ideal Management Buyout Candidate Company– Second Line Management Team In Place– Asset Intensive– Minimal Debt
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Getting Started
• Form An Advisory Team• Conduct An Ownership Transition
Analysis