Don't Step In It: How to Keep Your Boots Clean When You Retire, Die or... Don't Quite Die
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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
Will I have enough?
- 67% of NYSE companies are owned or controlled by families
- Relationships
- Loyalty
- Stability
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?
What if I die too soon?
- 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?
The Sale Price to Income Challenge
Motivating Employees
Rules of Thumb
Informal Business Valuation
Valuation
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
- 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
- A multiplier of gross annual revenues
"Sale too little" - issues
and opportunities
- Increase Cash Flow
- Increase Value
- Increase Return
- What are some industry standards?
- A multiplier of annual net earnings, plus fixtures, equipment & inventory
- Financial & insurance professionals
- 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
A QUALIFIED PLAN: Employee Stock Ownership Plan (ESOP)
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
- Stock or Assets
- Cross Purchase or Redemption
- Compensation & Benefits
- ESOP
- Recapitalization
Redemption/
Entity Purchase
- 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
- Parents want business to pass to children (or key employees)
- Sell interest in business to children for interest only note
- Some children are in the business; some are not
- Treat the children equitably
- 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
- 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
- Want to pass on majority of the wealth after the second of the two parents die
- Only principal (not appreciation) is taxed in estate
- 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