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Don't Step In It: How to Keep Your Boots Clean When You Retire, Die or... Don't Quite Die

Thank you!

Step 1: Set priorities

Family Business Issues

Competing Values

Needs for Owners & Executives

Considerations for Owners & Executives

  • One third of FORTUNE 500 companies are owned or controlled by families

Specific business owner issues:

Business

Family

  • Retirement funds -

Will I have enough?

  • Goals
  • Competence
  • Growth
  • 67% of NYSE companies are owned or controlled by families
  • Relationships
  • Loyalty
  • Stability
  • Healthcare -

How will I pay for it when I retire?

  • Family-owned businesses represent 62% of the U.S. workforce
  • When can I exit my business?
  • 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?
  • Survivor needs -

What if I die too soon?

  • Financial security -
  • 19% of family business participants have not completed any planning other than writing a will, and only 37% have written a strategic plan

What if I outlive my finances?

Step 2: Determine value

The Sale Price to Income Challenge

Motivating Employees

Rules of Thumb

Informal Business Valuation

Valuation

Dental Practice:

Who performs valuations?

  • A multiplier of annual net earnings plus fixtures, equipment & inventory

"More than enough"

- Issues and opportunities

  • Beauty is in the eye of the buyer
  • Taxes
  • Wealth Preservation
  • Charitable Giving

CASH BASED

EQUITY BASED

Law Practice:

  • Business appraisal firm
  • 0-100% annual fee revenue, dependent on client retention
  • Value is based on reasonable expectations
  • Business broker or investment banker

Sale Price

...needed to support

income goal

  • Cash Bonus
  • Nonqualified Deferred Compensation
  • Phantom Stock Plan
  • Stock Bonus
  • Stock Option
  • Stock Purchase

Accounting Practice:

  • A multiplier of gross annual revenues

"Sale too little" - issues

and opportunities

  • Increase Cash Flow
  • Increase Value
  • Increase Return
  • CPA

Medical Practice:

  • What are some industry standards?
  • A multiplier of annual net earnings, plus fixtures, equipment & inventory
  • Financial & insurance professionals

$2MM

$4MM

$8MM

$6MM

Real Estate Agency:

  • A percentage of gross annual commissions

Summary

Step 3: Sale to outsider/insider

Buy-Sell Techniques

Capital Transfers

Sale to Insiders OR Outsiders

Sources of Funding for the Exit Plan

Common Techniques

A QUALIFIED PLAN: Employee Stock Ownership Plan (ESOP)

Cross Purchase

BUS

  • Business Equity

COMPENSATION & BENEFITS:

A

B

  • Financing

Buy-Sell

Capital Transfers

Gift

  • Invests primarily in company stock
  • Permits borrowing to finance the cost
  • Qualified plan testing & administration
  • Annual stock valuation
  • S or C corporation status
  • Consulting Contract
  • Non-Qualified Deferred Compensation
  • Executive Bonus with Restrictive Endorsement
  • Select Reward Plan
  • Qualified Plan

A

  • Tax Benefits
  • Charitable
  • Family
  • Stock or Assets
  • Cross Purchase or Redemption
  • Compensation & Benefits
  • ESOP
  • Recapitalization

Redemption/

Entity Purchase

  • Insurance
  • 4 Steps of exit planning
  • Family considerations
  • What's the business worth?
  • Exit planning many times effects your estate
  • Maximize value
  • Minimize taxes
  • Maximize flexibility
  • Put a plan in place; pre-fund, if possible

Step 4: Estate/wealth transfer planning

Example 2: Interest Only Note

Interest Only Note - How It Works

Ten Estate Planning Mistakes

Inheritance Equalization-Solution

Example 1: Inheritance Equalization

Tax Sources

Estate/Wealth Transfer Planning

Elaine

Jerry

1.

SOLUTION

George

Kramer

CHALLENGE

SOLUTION

CHALLENGE

2.

Business

Capital Asset

Owner's

Family at

Death

Interest Only

  • Parents want business to pass to children (or key employees)
  • Sell interest in business to children for interest only note

Taxes Can be the Culprit

  • Some children are in the business; some are not
  • Treat the children equitably

Vandalay, Inc.

Value: $7M

$1.5M

policy

  • Business value is appreciating
  • Buyer buys life insurance on seller. At death, proceeds pay off principal on note
  • Set up irrevocable trust with 2nd to die life insurance policy
  • Want to treat all the children equally

3.

  • Too much jointly held property
  • Leaving everything to your surviving spouse
  • Your will is not your will
  • Improperly owned life insurance
  • Success in wealth accumulation and successful wealth transfer
  • Leaving retirement plans to your children
  • Lack of liquidity
  • Equally inequitable
  • Everyone must pay estate taxes
  • No integrated estate plan
  • Cost of a direct buyout is prohibitive

Principal

at Death

  • Want to pass on majority of the wealth after the second of the two parents die
  • Only principal (not appreciation) is taxed in estate

Life

Insurance

Policies

  • Capital Gains Tax
  • Alternative Minimum Tax Rate
  • Ordinary Income Top Tax Rate
  • Federal Estate Tax Rate
  • Use proceeds to provide wealth to children not involved in the family business

Income Asset

Estate

Vandalay

Estate

$7.5M

= Subject to taxation

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